Media release
The Auditor-General for New South Wales, Margaret Crawford, released a report today on how well four councils managed their local infrastructure contributions during the 2017-18 and 2018-19 financial years.
Local infrastructure contributions, also known as developer contributions, are collected from developers to pay for local infrastructure such as drainage, local roads, open space and community facilities. Controls over local infrastructure contributions help to ensure that all contributions owed are collected, funds are spent as intended, and any contributions paid in the form of works-in-kind or dedicated land are correctly valued.
The audit found that Blacktown City Council and City of Sydney Council provided effective governance over their local infrastructure contributions whereas Central Coast and Liverpool City Councils’ governance arrangements require improvement.
The audit found that three councils had spent local infrastructure contributions in accordance with approved contributions plans. Central Coast Council and the former Gosford City Council had spent $13.2 million on administration costs in breach of the Environmental Planning and Assessment Act 1979. These funds were repaid into the council’s local infrastructure fund during the course of the audit.
The Auditor-General made a number of recommendations for each council relating to improving controls over contributions and increasing transparency.
Auditor-General’s foreword
This audit examined the effectiveness of governance and internal controls over local infrastructure contributions, also known as developer contributions, held by four councils during the 2017–18 and 2018–19 financial years.
This performance audit was conducted with reference to the legislative and regulatory planning framework that was in place during that period.
Our work for this performance audit was completed at the end of March 2020 when we issued the final report to the four audited councils and the Department of Planning, Industry and Environment. We received their respective formal responses to the report’s recommendations during April and May 2020.
Concurrently to this audit, we sought Crown Solicitor’s advice (the ‘Advice’) regarding the use of local infrastructure contributions collected by local councils under the Environmental Planning and Assessment Act 1979 (‘the EPA Act’) for our financial audit work. The Advice clarified the applicable legislative requirements with reference to the application, investment and pooling of local infrastructure contributions. The Advice is included in Appendix 2 of this report. The Advice has not impacted on the findings and recommendations of this report.
Executive Summary
Councils collect Local Infrastructure Contributions (LICs) from developers under the Environmental Planning and Assessment Act (1979), the Local Government Act (1993) and the City of Sydney Act (2000) (EP&A Act, LG Act and City of Sydney Act) to fund infrastructure required to service and support new development. At 30 June 2018, councils across NSW collectively held more than $3.0 billion in LICs collected from developers. Just over $1.37 billion in total was held by ten councils. Councils collecting LICs must prepare a contributions plan, which outlines how LICs will be calculated and apportioned across different types of infrastructure. Councils that deliver water and sewer services prepare a development servicing plan (DSP) which allows them to collect contributions for water and sewer infrastructure.
Development timeframes are such that there is often several years between when LICs are collected and the infrastructure is required. Good governance and internal controls are needed over these funds to ensure they are available when needed and spent appropriately.
This audit assessed the effectiveness of governance and internal controls over LICs collected by four councils during the 2017–18 and 2018–19 financial years: Blacktown City Council, Central Coast Council, City of Sydney Council and Liverpool City Council. As at June 2018 these councils held the four highest LIC balances, each in excess of $140 million.
Audit Conclusion
Three of the four councils audited were currently compliant with legislation, regulations and Ministerial Directions regarding LICs. All had gaps in governance and controls over LICs which limited effective oversight.
Three of the councils included in the audit complied with legislation, regulations and Ministerial Directions relating to LICs. Central Coast Council breached the EP&A Act between 2001 and 2019 when it used LICs for administration costs. These funds were repaid in late 2019.
While controls over the receipt and expenditure of contributions funds were largely in place at all councils, there were some exceptions relating to valuing work and land delivered in lieu of cash. Three councils do not provide probity guidance in policies relating to LICs delivered through works-in-kind. Three of the councils had contributions plans that were more than five years old.
Staff at all four councils are knowledgeable about LICs but not all councils keep procedures up to date. Three councils' governance frameworks operate effectively with senior officers from across the council involved in decisions about spending LICs, entering into voluntary planning agreements (VPAs) and reviewing contributions plans.
Transparency over key information relating to LICs is important for senior management so they can make informed decisions, and for the community who pay LICs and expect infrastructure to be provided. During the period of the audit, none of the councils included in the audit provided sufficient information to senior management or their councillors about the projected financial status of contributions plans. This information would be valuable when making broader strategic and financial decisions. Information about LIC levies and intended infrastructure is available to the community but not always easy to find.
Key findings from the four audited councils
LICs were spent as intended at three of the four councils
Central Coast Council used LICs collected under the EP&A Act to pay for administration expenses under contributions plans. Administration expenses were paid using funds collected under 40 contributions plans inherited from Gosford City Council which had no allowance for administration. Central Coast Council repaid the LIC fund in late 2019.
The other three audited councils spent LICs in accordance with their relevant contributions plans.
All four councils had committees that provided oversight of LICs, three of which had senior representation to allow effective decision-making
All four councils had committees to manage LICs collected under the EP&A Act. The most effective LIC committees were at Blacktown City Council and City of Sydney Council where the committee membership included senior officers from across council who made decisions about spending LICs, reviewing contributions plans and negotiating VPAs.
Liverpool City Council had only recently established a LIC committee and it was too early to assess its membership or effectiveness. However, the LIC committee operated within a wider governance framework with other project committees that included senior officers from across council.
Central Coast Council's LIC committee did not have a sufficiently senior level of membership to be an effective decision-making body and did not address LICs collected for water and sewer under the LG Act.
Monitoring and reporting on future LIC cash flow was insufficient in all councils
None of the four councils regularly report to senior management or their councillors about the projected financial status of their contributions plans (or DSPs in the case of Central Coast Council). This means that management and the council are not able to include the projected financial status of LIC funds when considering broader strategic and financial issues.
Not all councils reviewed their contributions plans within the suggested timeframes
Blacktown City Council, Liverpool City Council and Central Coast Council all have contributions plans that have not been reviewed within the past five years, which is the timeframe suggested in guidance in the form of a Practice Note published in 2005 by the former Department of Infrastructure Planning and Natural Resources.
Reviewing contributions plans on a regular basis allows councils to reset assumptions underlying the plans and re-establish the basis for calculating contributions if necessary.
Not all audited councils' internal controls adequately addressed risks that can arise in the administration of LICs
A number of weaknesses were identified in internal controls at the four councils. These included:
- a lack of independence in valuations of works-in-kind and land at Central Coast Council and Liverpool City Council and in valuations of works-in-kind at Blacktown City Council
- a risk that security bonds paid by developers may be insufficient to cover the cost of undelivered or poor quality works-in-kind at Liverpool City Council and Central Coast Council
- a risk that LICs may not be collected at City of Sydney Council when accredited private certifiers issue construction certificates
- outdated policies and procedures at Central Coast Council and procedures at Blacktown City Council
- incomplete guidance relating to probity during negotiations with developers at Blacktown City Council, Central Coast Council and Liverpool City Council
- limited security over important data maintained in spreadsheets meaning that contributions calculations or credit and offset arrangements with developers could be manipulated.
Some good controls demonstrated included:
- City of Sydney Council independently values work and land offered by developers in lieu of cash contributions and Blacktown City Council independently values offers of land
- Blacktown City Council, Central Coast Council and Liverpool City Council check that LICs have been paid when construction certificates are lodged for complying developments and follow up with developers if LICs are outstanding
- City of Sydney Council recognises that security over works-in-kind may be insufficient due to the rising cost of work and incorporates into the Deed of Agreement the right to claim the difference from the developer
- Blacktown City Council requires security over works-in-kind of 125 per cent of the value of the work to ensure that sufficient funds are available if the value of the work has increased.
The LIC system is largely transparent, with some exceptions
A Practice Note published by the former Department of Infrastructure Planning and Natural Resources, and Determinations published by the Independent Pricing and Regulatory Authority (IPART) relating to water and sewer LICs, make reference to the importance of transparency over LICs.
Information about LICs collected and how they are spent is available to the public although contained in different documents and web pages. Plans to collect and spend LICs are included in contributions plans and Development Servicing Plans (DSPs) which are exhibited to the community prior to being adopted and are then available as public documents.
There is a lack of transparency over how cash collected under VPAs is spent. Information about the intended use of cash is available, but only Liverpool City Council publishes information about how LICs are actually spent.
Staff at all four councils were knowledgeable about LICs but not all councils kept procedures up to date
Staff and managers at all four of the audited councils were knowledgeable about LICs and the regulatory environment.
Blacktown City Council and Central Coast Council were heavily reliant on the knowledge of specific staff members due to outdated procedural documentation.
Insights for the Local Government sector
| Governance of LICs |
The councils that demonstrated good governance had effective LIC committees to oversee the collection, management and expenditure of LICs. Effective committees had a senior level of membership from across the councils and acted as a decision-making forum. The Practice Note contains guidance about the establishment of LIC committees. Councils would benefit from understanding the projected financial status of their contributions plans and DSPs. Knowing if a contributions plan or DSP is on track to collect sufficient funds to deliver the required infrastructure would help senior management to know whether the contributions plans or DSPs needs to be reviewed, alternative sources of funding need to be considered, or other council strategies or policies need to be revised. |
| Internal Controls over LICs |
Controls over LICs help to ensure that all LICs owing are collected, LICs are spent as intended and that the council does not over-pay for contributions delivered as works-in-kind or dedicated land. Controls also help to manage probity in dealing with developers and ensure that important information is protected. Councils do not always obtain independent advice relating to the value of contributions in the form of works-in-kind and dedicated land. Councils that ask developers to pay for these valuations should conduct sufficient due diligence to be confident about the independence of the valuation. Councils that rely on spreadsheets to manage important information should ensure that appropriate security is in place over the spreadsheets and the data. |
| Transparency over LIC information | Transparency over key information relating to LICs is important so that the community knows that the right amount of LICs is being collected and spent as it should. While most information about LICs is publicly available, it is not always easy to find. When presenting information to the public about capital works expenditure, councils should consider including information about the source of funding. This helps communities to understand how council's different funding streams are spent, including LICs and VPAs. |
1. Introduction
1.1 Local infrastructure contributions
Activities that intensify the use of land, such as commercial or residential development, increase the need for infrastructure.
Property developers pay contributions to both the State Government and local councils to help with the cost of infrastructure required to service and support their developments. Special infrastructure contributions (SICs) are paid to the State Government to help fund state and regional roads and to purchase land for State Government services.
Local infrastructure contributions (LICs) are paid to local councils by property developers to meet the increased demand for basic, essential, and community infrastructure created by new development.
LICs are managed as restricted funds, meaning they can only be spent on the purpose for which they were collected.
When a development application is approved, payment of a LIC is included as a condition of consent. Councils have discretion to accept offers for developers to pay contributions in the form of cash, dedicated land, or works-in-kind.
LICs can be used to wholly or partly fund infrastructure, depending on the extent to which the development activity is expected to generate demand for the infrastructure.
At 30 June 2018, councils across NSW collectively held more than $3.0 billion in LICs collected from developers. Just over $1.37 billion in total was held by ten councils.
Large unspent balances of infrastructure contributions reflect infrastructure that has been paid for, but not yet delivered. This can be of concern to growing communities that require infrastructure to manage stormwater and drainage, keep traffic moving, and contribute to healthy and engaged populations through open space and recreational facilities.
While there may be sound reasons for large balances at times, strong governance and controls are required to ensure these funds are available when needed and spent as intended.
1.2 Regulatory environment for LICs
Legislation and regulations
Collection of LICs included in the scope of this audit is permitted under the EP&A Act, the LG Act and the City of Sydney Act.
The legislation is supplemented by the EP&A Regulation 2000, Developer Contributions Practice Notes (the Practice Note) published in 2005 by the former Department of Infrastructure Planning and Natural Resources, and Ministerial Directions. Guidance relating to the collection of S64 contributions by Central Coast Council is provided in Determinations published by the Independent Pricing and Regulatory Tribunal (IPART) (S64 Guidance). For all other councils that deliver water and sewer services, S64 guidelines are published by the former Department of Primary Industries.
Contributions plans and DSPs
Councils wishing to levy LICs under the EP&A Act or City of Sydney Act must prepare a contributions plan, which outlines how contributions will be calculated and apportioned across different types of infrastructure.
Councils that provide water and sewer services must prepare a development servicing plan (DSP) which outlines the developer charges for water and sewer, the basis for those charges, and the planned expenditure, including timing, of funds collected.
Contributions plans for S7.11 funds and DSPs for S64 funds must demonstrate a 'nexus', or a direct relationship between expected development and the infrastructure required as a consequence of that development. Where demand for infrastructure is only partly derived from development, the contributions plan or DSP will indicate the portion of the infrastructure cost to be funded by LICs. The remaining cost will be funded through other council resources.
Source: Audit Office Research.
Voluntary Planning Agreements
Voluntary planning agreements (VPAs) are arrangements between developers and either councils or the State Government for infrastructure contributions collected for purposes not covered by a contributions plan. Section 7.4 of the EP&A Act allows councils and developers to voluntarily agree to a contribution arrangement. Examples of this could include a developer paying an additional contribution in relation to a change to a planning instrument or contributing infrastructure that was not anticipated at the time the contributions plan was developed. Contributions collected under a VPA do not have to demonstrate the same direct support for the infrastructure needs associated with the development as those collected under a contributions plan, although they must be related to the development in some way.
Under the EP&A Regulation, councils are required to maintain a public register of planning agreements and make copies of the agreements available for public inspection. This contributes to transparency over VPAs which is discussed further in Chapter 4.
1.3 About the audit
This audit assessed the effectiveness of the governance and internal controls over LICs at the four councils with the largest cash balances at 30 June 2018. Blacktown City Council, Liverpool City Council, and City of Sydney Council are all Sydney metropolitan councils. Central Coast Council is a regional NSW council, located approximately 95 kilometres north of Sydney.
According to a 2016 report from the former NSW Department of Planning and Environment, these four Local Government Areas are among the fastest growing areas in NSW in terms of population. Central Coast is the fastest growing regional Local Government Area in the state.
The audit examined governance and internal controls over local infrastructure contributions during the two financial years 2017–18 and 2018–19.
The audit answered these questions:
- Do councils have effective governance arrangements and internal controls in place over the collection, management, and disbursement of local infrastructure contributions and which include accountability for each part of the process?
- Do councils regularly report to those charged with governance or other senior officers on the status, investment performance, and risks related to local infrastructure contributions?
- Can councils demonstrate that local infrastructure contributions have been spent on, or are being used for, their intended purpose as described in the development contributions plan?
- Are local infrastructure contributions managed by individuals with the appropriate knowledge and skills to perform their duties?
More information about the audit approach is in Appendix three.
2. Governance of LICs
A strong governance framework is important at each council to ensure that the funds are managed well, available when needed and spent as intended. The audit examined the following features of each council's governance framework as they apply to LICs:
- decision-making by councillors and council officers relating to LICs
- monitoring delivery of contributions plans and DSPs including:
- reviewing assumptions underlying the plans
- monitoring projected status of plans.
2.1 Decision-making
Councillors are involved in key decisions about LICs
Councillors are accountable to their communities through open and transparent decision-making as well as regular planning and reporting. The involvement of councillors in key decisions about LICs contributes to transparency over how LICs are collected, managed and spent.
At all four of the audited councils, councillors are involved in key decisions about LICs. The audit found that councillors are involved in the following decisions:
Two of the audited councils had effective LIC Committees
LICs can represent a significant source of council’s annual revenue and cash balance.
Management of this asset and cash flow, and decisions about how and when the funds should be spent, requires the involvement of senior managers from across the council.
The Practice Note suggests that LIC Committees with senior officers from across the council included in the membership can be important forums for:
- managing LICs
- making decisions to spend LICs or enter into VPAs with developers
- monitoring work funded by LICs
- reviewing contributions plans
- coordinating different parts of the council organisation to ensure that infrastructure is delivered when needed.
Blacktown City Council and City of Sydney Council have effective LIC committees in place. Senior managers from across council meet regularly to make decisions about the collection, management and expenditure of LICs, and to endorse or reject land acquisitions and VPA proposals. Blacktown City Council has two LIC committees with slightly different membership, one that focuses on financial management of LICs and the other on more strategic planning matters.
Central Coast Council has a committee in place, but it has no formal charter, does not deal with S64 funds and senior officers do not regularly attend committee meetings. This limits the committee's decision-making capacity.
Liverpool City Council established a committee in April 2019 to manage contributions plans and support business units to initiate relevant infrastructure projects. The committee was too new to be assessed for effectiveness during the audit period 2017–18 and 2018–19. We note that this committee sits within an existing governance framework that includes three other committees, all with senior membership from across the council. In February 2019, following an internal audit that found weaknesses in LIC governance, these committees began monitoring and managing collection and expenditure of LICs.
2.2 Monitoring
The Practice Note recognises that a risk for councils is having insufficient funds available to provide required infrastructure when it is needed. Regular review of contributions plans and DSPs ensures that these plans reflect the latest planning assumptions and up-to-date costs of providing infrastructure.
Contributions plans and DSPs are akin to a long-term budget for delivering particular types of infrastructure. Regular monitoring of the current and projected financial status of these plans provides information about whether development activity is on track to deliver sufficient LICs to fund the required infrastructure. This information is important input into broader strategic and financial decisions.
Not all councils reviewed contributions plans within the suggested timeframes
The Practice Note and S64 Guidance indicate that contributions plans and DSPs should be reviewed at least every five years. City of Sydney is the only audited council that does not have contributions plans older than five years.
Regular review of contributions plans and DSPs provides an opportunity to realign the plans with any changes to council's own strategic plans and planning instruments and review and revise factors underpinning the plans such as:
- population estimates and council boundaries
- construction standards and costs
- land values and the cost of labour
- appropriateness of indexes used in the plan
- affordability of discounts and exemptions.
| Blacktown City Council | Central Coast Council | City of Sydney Council | Liverpool City Council |
|---|---|---|---|
| reviews contributions plans for its five growth areas every two years. Two of 15 contributions plans are more than eight years old. | is currently reviewing and consolidating more than 50 contributions plans inherited through amalgamation, 47 of which are more than five years old, and completed a review of DSPs in 2019. | reviews plans every five years. | has a policy to review ‘on a regular basis’.Two of six plans are more than ten years old. |
Older contributions plans and DSPs (more than five years old) may include outdated infrastructure costs or infrastructure that is no longer necessary or no longer aligned with council's latest strategies and planning instruments. This means councils may not be collecting sufficient LICs to fund required infrastructure or may be collecting LICs for infrastructure that is no longer needed.
Councils publish annual financial statements for their contributions plans
All of the audited councils provide a statement of developer contributions in their annual financial statements. This is a requirement in the Local Government Code of Accounting Practice and Financial reporting published by the former Office of Local Government.
This statement identifies how much has been collected and spent, and the overall balance for different categories of infrastructure, information which helps the community understand how council is using LICs to fund different types of infrastructure.
The statement also includes information about council's use of tools that help to manage LIC cash flow:
- pooling funds across contributions plans and infrastructure categories, a form of internal borrowing that must be repaid with interest
- non-cash contributions from developers (works-in-kind and land dedications).
None of the audited councils report regularly to management on the projected financial position of their contributions plans
LICs are only one source of funds available to councils for infrastructure. Other sources include:
- loans from financial institutions which are repaid using LICs
- other council funds
- leasing rather than building infrastructure
- partnering with private organisations to build infrastructure
- grants.
Selecting the most appropriate mix of infrastructure funding requires councils to understand the risks and availability of each funding source. With regard to LICs as a source of funds, none of the audited councils assess or report on the projected position of contributions plans or DSPs to senior management or the elected council. This means councils are not able to forecast the capacity of LICs to meet their infrastructure needs, and the potential requirement for alternative funding.
We note that Blacktown City Council is undertaking work to model future infrastructure funding requirements and Liverpool City Council has developed shortfall calculators for some contributions plans. In addition, after the audited period, Liverpool City Council provided its senior management and council with information about the projected status of some contributions plans.
Improved scrutiny over the projected financial position of contributions plans and DSPs would help each council to assess the most appropriate mix of funding sources for delivering infrastructure.
3. Internal controls
Internal controls over LICs are important to promote accountability, prevent fraud and deliver infrastructure to the required standard at the best possible price. If financial controls are weak or are not implemented well, there is a risk that LICs are misspent or that councils pay too much for infrastructure.
Not all councils' internal controls adequately addressed risks associated with the administration of LICs
The audit examined a number of internal controls that manage risks related to LICs. These included:
- financial controls over receipt and expenditure of LIC funds
- management of conflicts-of-interest when dealing with developers
- independent valuations of works-in-kind and dedicated land
- ensuring delivery and quality of works-in-kind, and obtaining security from developers in the event of non-delivery or poor quality work
- management of variations to VPAs and works-in-kind agreements.
We reviewed controls included in policies and procedures and then checked samples of work to ensure that controls were implemented. We found variation in the controls that councils implemented, and some weaknesses in controls. It is a matter for each council to assess their financial risk and develop internal controls that support the collection, management, and expenditure of LICs. However, councils must be able to assure their communities and developers that they are doing everything possible to collect all LICs owing and that work conducted by developers in lieu of cash payments is properly valued and carried out to the required standard.
Further information about audit findings in relation to internal controls for each council are included in chapters five to eight. The exhibit below demonstrates variation in several controls implemented in the audited councils.
Source: Audit Office analysis.
Three of the four audited councils spent LICs in accordance with contributions plans and DSPs
In 2017–18 and 2018–19, three of the audited councils had spent LIC funds in accordance with the relevant contributions plans.
During the course of the audit, Central Coast Council told us that between 2001 and 2016 the former Gosford City Council, now merged into Central Coast Council, used funds collected under 40 S7.11 contributions plans to pay for administration expenses. This was a breach of the EP&A Act as these contributions plans made no allowance for administration expenses. Following amalgamation in 2016, this practice continued until 2019 under Central Coast Council.
The Council made an adjustment of $13.2 million in the 2018–19 financial statements to reimburse the LIC fund from the general council fund. This adjustment includes interest foregone since 2001.
Council policies do not always require probity over negotiations with developers
When negotiating VPAs and works-in-kind arrangements with developers, councils need to be mindful of probity and the potential for staff to have conflicts of interest. The Practice Note provides guidance for councils negotiating VPAs. Some of the guidance is equally applicable to councils negotiating works-in-kind agreements with developers, especially where it relates to the potential for misuse of council's discretion when negotiating outcomes.
In line with the Practice Note, VPA policies and procedures at all four councils included in the audit address at least some of these risks and the councils have included guidance in their VPA policies such as requiring staff to consider separation of duties and conflicts of interest.
Works-in-kind policies at Blacktown City Council, Liverpool City Council, and the draft works-in-kind policy at Central Coast Council provide no guidance about how to declare and manage these risks. Blacktown City Council partially mitigates this risk by monitoring all works-in-kind arrangements through the S7.11 Committee.
Staff and management are knowledgeable about LIC regulations, but not all councils keep policies and procedures up to date
Staff and managers at all four of the audited councils are knowledgeable about LICs and the regulatory environment.
The regulatory framework for LICs is complex and only limited training is available for planners in NSW. Staff interviewed during the audit demonstrated a good understanding of the requirements of the regulatory framework. Three of the four audited councils demonstrated use of external experts to assist with specific tasks and interpretations of the EP&A Act.
It is important that policies and procedures are kept up to date to support staff in their roles. Outdated or missing policies and procedures introduce the risk of inconsistent practices and staff making their own judgements about what to do. It also increases reliance on key staff and introduces key person risk as the council is overly reliant on particular individuals.
Policies and procedures at Central Coast Council have not been harmonised across the amalgamated council. In addition, the council has not developed policies or procedures relating to collection or expenditure of S64 LICs, nor the review of DSPs. Procedures at Blacktown City Council are out of date.
Councils do not always secure key information contained in spreadsheets
At all four councils, staff who manage LICs are reliant on spreadsheets to calculate contributions owed and, where applicable, manage credit banks.
Spreadsheets have no audit trail and data in them can be easily changed, overridden or accidentally lost. The Institute of Internal Auditors (IIA) provides guidance about managing risks associated with spreadsheets. The audit assessed five aspects of spreadsheet security suggested by the IIA and found varied use of spreadsheet controls at the four audited councils.
| Blacktown City Council | Central Coast Council | City of Sydney Council | Liverpool City Council | |
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| Access to spreadsheets is restricted and monitored |
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| Spreadsheets are stored safely and backed up regularly |
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| Spreadsheets are password-protected |
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| Management check the accuracy and completeness of the data |
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| Changes to spreadsheets are logged |
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c in part
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a Spreadsheets are not password protected, but they are kept on a shared drive with restricted access.
b Spreadsheets are not checked for accuracy and completeness of the data, but they must balance with financial systems.
c Saving a copy under a new name every quarter to create a partial audit trail.
4. Transparency
In a 2018 report, the Independent Commission Against Corruption noted that 'the appetite for transparency is expanding in both the public and private sectors'.
The Practice Note and S64 Guidance refer to transparency, including the importance of transparency over:
- calculation and apportionment of LICs
- funding of infrastructure, including where and when infrastructure is delivered
- arrangements made with developers through VPAs.
The LIC system is largely transparent for community members who know where to look
Contributions plans and DSPs are public documents, exhibited to the public before being adopted by council. Councils included in the audit publish their contributions plans and DSPs on their websites and meet statutory requirements with regard to reporting and accessibility of information.
However, other public information relating to the LIC system is fragmented across different websites and reports and varies in detail across councils.
| Blacktown City Council | Central Coast Council | City of Sydney Council | Liverpool City Council | |
|---|---|---|---|---|
| Financial details about contributions collected and spent | Financial statements | Financial statements | Financial statements | Financial statements |
| Implementation plans for spending LICs | Contribution plans | S64 implementation plans in DSPs. S7.11 & S7.12 implementation plans developed annually within capital works plan | Contribution plans | Developed annually within capital works plan |
| Capital works underway or completed, funded by LICs | Capital works plan and annual report | Not published | Not published | Capital works plan |
The Practice Note states that councils are accountable for providing the infrastructure for which contributions are collected. Demonstrating that infrastructure has been provided is difficult with fragmented information. As an example of transparent reporting, Blacktown City Council's 2018–19 annual report includes information about infrastructure that has been delivered for every contributions plan, providing transparency over how LICs have been spent.
Use of LICs collected under VPAs is not always transparent
Contributions collected under VPAs are not required to demonstrate the same relationship to a development as LICs collected under section 7.11 of the EP&A Act. VPAs are often negotiated because a developer requests a change to a planning instrument, and it is important that these arrangements, and their outcomes, are transparent to the community.
The EP&A Regulation includes mechanisms to ensure that VPAs are partially transparent. VPAs are exhibited to the public and approved by the elected council. Councils must maintain a VPA Register and make the VPA Deeds of Agreement available on request. However, there is no obligation on council to report on the outcomes or delivery of developers' obligations under VPAs. The four audited councils vary in transparency and accessibility of information available about VPAs.
| Blacktown City Council | Central Coast Council | City of Sydney Council | Liverpool City Council | |
|---|---|---|---|---|
| VPA Register | Council website and annual report | Annual report | Annual report | Council website and annual report |
| VPA Deeds of Agreement | Council website | Available on request | Available on request | Council website |
| Intended use of LICs collected under VPAs | In Deeds of Agreement | In Deeds of Agreement | In VPA Register and most Deeds of Agreement | In VPA Register and most Deeds of Agreement |
| Completion of work funded by cash collected under VPAs | Not published | Not published | Not published | Not published |
| Delivery of works-in-kind or land negotiated under VPAs | Not published | Not published | In VPA Register | Not published |
The Practice Note suggests that councils incorporate the intended use of LICs collected under VPAs in the Deed of Agreement, but there is no guidance relating to transparency over where and when funds have actually been spent. There is merit in councils providing greater transparency over public benefits delivered through VPAs to give communities confidence in VPAs as a planning tool.
Credit arrangements with developers are not always well documented or monitored
When levying LICs, section 7.11(6) of the EP&A Act requires councils to take into account land, money, or works-in-kind that the developer has contributed on other development sites over and above their LIC obligations. This section of the EP&A Act allows a developer to offset a LIC owed on one site against land or works contributed on another. This leads to some developers carrying 'credits' for work delivered to councils, to be paid back by reduced LICs on a future development. Blacktown City Council and Central Coast Council allow developers to carry credits. Liverpool City Council and City of Sydney Council do not permit credits and instead pay the developers for any additional work undertaken.
Councils should formally document credit arrangements and have a robust process to validate and keep track of credit balances and report on them. Central Coast Council does not keep good track of credit arrangements and neither Blacktown City Council or Central Coast Council aggregate or report on outstanding credit balances.
5. Blacktown City Council
Blacktown City Council manages the largest LIC fund in NSW and negotiates more VPAs than any other council. Overall, Blacktown City Council demonstrates effective governance over the LIC funds but there is scope for improved oversight of the projected financial status of contributions plans and credit arrangements with developers. Blacktown City Council also needs to update its operating procedures relating to LICs and improve security over key information.
Blacktown City Council is managing areas with high growth. There is a risk that Blacktown City Council will be unable to collect sufficient LICs to fund the infrastructure required to support that growth. However, Blacktown City Council does not assess and report to senior management or its Audit, Risk and Improvement Committee about the projected financial status of contributions plans.
Blacktown City Council has policies in place to guide the management of LICs although management of credit arrangements with developers requires greater oversight. Policies relating to works-in-kind agreements provide no guidance about probity in negotiations with developers and valuations of works-in-kind are not independent as they are paid for by the developer. Blacktown City Council's S7.11 committee structure could act as a model for other councils. Blacktown City Council is spending LICs according to its contributions plans. Staff managing LICs demonstrate good knowledge of the regulatory environment. However, a number of administrative processes need attention such as outdated procedures, lack of security over key spreadsheets, and inappropriate retention of sensitive personal data.
Recommendations
By December 2020, Blacktown City Council should:
- regularly report to senior management on the projected financial status of contributions plans
- update council's works-in-kind policy to address probity risks during negotiations with developers
- mitigate risks associated with lack of independence in valuations of works-in-kind
- improve public reporting about expenditure of cash collected under VPAs
- improve management oversight of credit arrangements with developers
- update procedures for managing LICs
- implement security measures over critical or personal information and spreadsheets.
5.1 LICs at Blacktown City Council
Blacktown City Council is a metropolitan council located approximately 44 kilometres north-west of the Sydney CBD. Between 2013 and 2018, the Blacktown Local Government Area experienced the third highest growth in NSW.
At 30 June 2019, Blacktown City Council was holding $214 million in developer contributions collected under S7.11and S7.4 of the EP&A Act. A breakdown of these funds apportioned across the infrastructure categories for which they were collected is shown at Exhibit 12.
5.2 Additional findings for Blacktown City Council
Findings in this chapter address only those not already addressed in Chapters 2–4.
Personal information is not managed in accordance with the Privacy and Personal Information Protection Act 1998 (PPIP Act)
Ratepayers sometimes ask council to acquire their land earlier than specified in a contributions plan on the grounds of hardship. Personal details are included in support of hardship claims. The audit found that Blacktown City Council distributes hardship claims via email to staff involved in determining the hardship claim and also retains the original claim in the records management system.
In line with council's own Privacy Management Plan, which references the PPIP Act and Health Records and Information Privacy Act 2002 (HRIP Act), council should keep this personal information on file for no longer than the purpose for which it is required, dispose of it securely, and protect against loss, unauthorised access, use, modification, and disclosure.
6. Central Coast Council
Central Coast Council's governance and internal controls over LICs were not fully effective. Between 2001 and 2019, more than $13.0 million in LICs was misspent on administration costs in breach of the EP&A Act. There is scope for improved oversight of the projected financial status of contributions plans and credit arrangements with developers. Policies and procedures from the two former councils are not aligned.
In May 2016, the newly amalgamated Central Coast Council inherited 53 contributions plans from the former Gosford City and Wyong Shire Councils. Managing this number of contributions plans fragments the available funds and increases complexity. Central Coast Council is currently working on consolidating these plans. Between June 2016 and June 2019, its LIC balance doubled from $90.0 million to $196 million. Central Coast Council does not assess and report to senior management or its Audit, Risk and Improvement Committee about the projected financial status of contributions plans. Central Coast Council has a LIC committee but it has no formal charter and senior officers do not regularly attend meetings. This limits the committee's effectiveness as a decision-making body. A draft policy relating to works-in-kind agreements provide no guidance about probity in negotiations with developers. Valuations of works-in-kind and land dedications are not independent as they are paid for by the developer.
Central Coast Council has adjusted its accounts in 2018–19 by $13.2 million to repay the LIC fund for administration expenses that were not provided for in 40 contributions plans.
Recommendations
By June 2020, Central Coast Council should:
1. obtain independent validation of the adjustment made to the restricted asset accounts and general fund to repay LICs spent on administration, and adjustments made to each infrastructure category within the contributions plans
2. publish current contributions plans from the former Gosford City Council on the Central Coast Council website.
By December 2020, Central Coast Council should:
3. regularly report to senior management on the projected financial status of contributions plans
4. increase transparency of information available to the public about LIC works planned and underway, including intended use of contributions collected under VPAs
5. consolidate existing plans, ensuring the new contributions plans includes a regular review cycle
6. develop a formal charter for the developer contributions committee and increase the seniority of membership
7. complete and adopt council's works-in-kind policy currently under development, ensuring it addresses probity risks during negotiations with developers
8. mitigate risks associated with lack of independence in valuations of works-in-kind and dedicated land
9. improve public reporting about expenditure of cash collected under VPAs
10. improve management oversight of credit arrangements with developers
11. implement security measures to ensure the integrity of key spreadsheets used to manage LICs
12. align policies and procedures relating to LICs across the amalgamated council including developing policies and procedures for the management of S64 LICs
13. update council's VPA policy to address increased or indexed bank guarantees to accommodate cost increases.
6.1 LICs at Central Coast Council
Central Coast Council is a regional NSW council, located approximately 95 kilometres north of Sydney. It was formed in 2016 due to the amalgamation of the former Gosford City and Wyong Shire Councils.
At 30 June 2019, Central Coast Council was holding $189 million in contributions collected under S7.11 and S7.12 of the EP&A Act and S64 of the LG Act. An additional $5.5 million had been collected under VPAs. A breakdown of these funds apportioned across the infrastructure categories for which they were collected is shown at Exhibit 13.
Source: Audit Office analysis based on Central Coast Council draft financial statements 2018–19, not including funds collected under VPAs.
6.2 Additional findings for Central Coast Council
Findings in this chapter address only those not already addressed in Chapters 2–4.
The balance of LICs at Central Coast Council has increased in recent years
Upon amalgamation in May 2016, Central Coast Council inherited a combined LIC balance of $89.6 million from the former two councils. Since amalgamation, the balance has been increasing and at 30 June 2019 had reached $194 million.
During that period, LIC contributions collected (including works-in-kind and land) have averaged $33.0 million per year against average expenditure of $7.0 million per year. An increasing balance with relatively low expenditure represents infrastructure that developers have paid for, but which the community has not received.
Central Coast Council is managing a large number of contributions plans
Upon amalgamation in May 2016, Central Coast Council inherited a large number of contributions plans from the former Gosford City and Wyong Shire councils, many covering relatively small geographic areas. The fragmented nature of the plans means that in some cases quite small balances can remain unused for a long time while council waits for sufficient contributions to build up so that infrastructure specified in the contributions plans can be delivered. Multiple plans covering small areas, some overlapping, makes it difficult for developers to know which contributions plan applies and how much they must pay.
In addition, 47 of Central Coast Council's contributions plans are more than five years old.
| Type of CP | Former Gosford City Council | Former Wyong Shire Council | Total CPs managed by Central Coast Council |
|---|---|---|---|
| S7.11 plans | 41 | 10 | 51 |
| S7.12 plans | 1 | 1 | 2 |
| Total contributions plans | 42 | 11 | 53 |
In August 2017, Central Coast Council engaged expert assistance to consolidate these plans and develop a framework and policies for the amalgamated council going forward. The new consolidated contributions plan is not expected to be ready until the middle of 2021 at the earliest.
We note that the 42 contributions plans for the former Gosford City Council are not published on Central Coast Council's website. These should be added to the website so that developers know what contributions plans apply to areas they are considering developing and what levies they are expected to pay, and the public knows what infrastructure is planned.
There are weaknesses in financial controls over funds and transactions, and spreadsheets
A review of financial controls over LICs found weaknesses including:
- lack of evidence that reconciliations were independently reviewed
- no records of reconciliations between the general ledger and subledgers
- staff approved expenditure without appropriate delegation as the delegations in the financial system were incorrect
- reviews of access to the two financial systems, Authority and Pathways were not systematically conducted.
In addition, when Central Coast council reviewed its 2014 DSPs not all existing water and sewer infrastructure was identified for inclusion in the revised 2019 DSP. This meant that S64 funds could not be collected to pay for that infrastructure.
At the conclusion of the financial audit for 2018–19, the Audit Office provided Central Coast Council with a management letter containing details of the control weaknesses. Such controls are critical to ensuring the integrity of the LICs fund as, without adequate controls, records can be manipulated, and contributions funds erroneously spent on items not included in contributions plans.
7. City of Sydney Council
City of Sydney Council manages a complex development environment across the Sydney CBD and inner suburbs. Overall, governance and internal controls over LICs are effective although there is scope for improved oversight of the projected financial status of contributions plans.
City of Sydney Council maintains a large balance of LICs, although not excessive relative to the annual level of LIC expenditure. Unspent contributions are largely associated with open space infrastructure that cannot be delivered until suitable land is available. Thirty per cent of cash contributions are collected under VPAs and there is limited transparency over how these funds are spent. City of Sydney Council does not assess and report to management or its Audit, Risk and Compliance Committee about the projected financial status of contributions plans.
In 2017–18 and 2018–19, LICs were spent in accordance with the corresponding contributions plans. City of Sydney Council staff are knowledgeable about the regulatory environment and are supported by up-to-date policies and procedures.
Recommendations
By December 2020, City of Sydney Council should:
- regularly report to senior management on the projected financial status of contributions plans
- improve public reporting about expenditure of cash collected under VPAs
- periodically review the risk of unpaid LICs associated with complying development certificates and assess whether additional controls are required
- implement security measures to ensure the integrity of key spreadsheets used to manage LICs.
7.1 LICs at City of Sydney Council
City of Sydney is the Local Government Area that covers the Sydney central business district and surrounding inner city suburbs. Much of the development in the City of Sydney is commercial and high-density residential with some urban renewal. The planning environment is complex due to parts of the CBD being managed by the State Government, a large number of heritage-listed sites and a complex mix of commercial, residential and open space development.
At 30 June 2019, City of Sydney Council was holding $71.0 million in contributions collected under S7.11 of the EP&A Act and S61 of the City of Sydney Act. A further $70.5 million had been collected under VPAs. A breakdown of funds collected, apportioned across the infrastructure categories for which they were collected, is shown at Exhibit 16.
7.2 No additional findings for City of Sydney Council
All findings have been addressed in Chapters 2–4.
8. Liverpool City Council
During the audit period 2017–18 and 2018–19, Liverpool City Council did not have effective governance and internal controls over LICs. Liverpool City Council is addressing deficiencies and risks identified through an internal audit published in December 2018 although further work is required. There is scope for improved oversight of the projected financial status of contributions plans.
In the two years to 30 June 2019, the balance of unspent LICs increased by more than 60 per cent against a relatively low pattern of expenditure. Prior to an internal audit completed in late 2018, there was no regular reporting on the status of LICs and a lack of transparency when prioritising the expenditure of LIC funds. During 2019, and following the internal audit, Liverpool City Council engaged additional skilled resources to improve focus and accountability for LICs. A LIC committee has been established to manage contributions plans and support business units to initiate relevant infrastructure projects, although it is too early to assess whether this committee is operating effectively. From February 2019, Liverpool City Council commenced monthly reporting to its Chief Executive Officer (CEO) about the point-in-time status of LIC funds, and to its Audit, Risk and Improvement Committee about risks associated with LICs and the implementation of internal audit recommendations. There is limited reporting to senior management about the projected financial status of some contributions plans. Our audit found no evidence of misuse of funds during the audited period. Methods for valuing work and land are not aligned with policies and procedures and are implemented inconsistently. In addition, valuations of works-in-kind and land dedications are not independent as they are paid for by the developer. The policy relating to works-in-kind provides no guidance about managing probity risks when negotiating with developers.
Recommendations
By December 2020, Liverpool City Council should:
- regularly report to senior management on the projected financial status of contributions plans
- update council's policies and procedures to provide consistent guidance about how works and land offered by developers should be valued
- update council's Works-in-Kind and Land Acquisition Policy to address probity risks during negotiations with developers
- improve public reporting about expenditure of cash collected under VPAs
- mitigate risks associated with lack of independence in valuations of works-in-kind and dedicated land
- implement security measures over critical or private information.
8.1 LICs at Liverpool City Council
Liverpool City Council is a metropolitan council located approximately 40 kilometres south-west of the Sydney CBD. The Local Government Area is expected to experience substantial population growth over the next 20 years, driven by development of Sydney's second airport at Badgerys Creek within the Liverpool Local Government Area and recognition of Liverpool city centre as one of Sydney's future central business districts.
At 30 June 2019, Liverpool City Council was holding $160 million in developer contributions collected under S7.11 and S7.12 of the EP&A Act. A breakdown of these funds apportioned across the infrastructure categories for which they were collected is shown at Exhibit 17.
8.2 Additional findings for Liverpool City Council
Findings in this chapter address only those not already addressed in Chapters 2–4.
The balance of LICs at Liverpool City Council has increased in recent years
The balance of local infrastructure funds at Liverpool City Council has increased by more than 60 per cent from $98.3 million to $159.6 million since the start of the 2017 financial year. Expenditure over that same period averaged $23.0 million per year. An increasing balance with relatively low expenditure represents infrastructure that developers have paid for, but which the community has not received. The audit examined expenditure during the 2017–18 and 2018–19 financial years and found no evidence of mis-spending.
The reduced rate of increase in the 2018–19 financial year is due to both a decrease in LICs received and increased expenditure by council.
Valuation of works-in-kind at Liverpool City Council is inconsistent
When developers offer to deliver works-in-kind or dedicate land in full or partial payment of their LIC, councils must agree a value for that work or land with the developer. If work or land is over-valued, the reduction in contributions is greater than necessary.
Similarly, when VPAs are arranged with developers, work or land contributed by developers as part of those agreements must be appropriately valued.
The council advised that it requires developers to provide quotes from three contractors for all works-in-kind. However, we found that this requirement was not always enforced. Developers had not provided three quotes in either of the two samples we reviewed. In addition, Liverpool City Council's revised policy for valuing works-in-kind, adopted in February 2019, does not require three quotes, nor does its process map for arranging works-in-kind.
Similarly, the policy for valuing land dedications requires the developer to provide a valuation from a registered land valuer. Staff provided an example where a land valuation had been used, but other samples we reviewed used alternative methods to value land. These included:
- latest Average Estimated Land Acquisition Cost per square metre (published by council)
- value of recent adjoining land acquisitions.
Personal information is not managed in accordance with the Privacy and Personal Information Protection Act 1998 (PPIP Act)
Ratepayers sometimes ask council to acquire their land earlier than specified in a contributions plan on the grounds of hardship. Personal details are included in support of hardship claims. The audit found that Liverpool City Council retains the original claim and personal details in its records management system.
In line with council's own Privacy Management Plan, which references the PPIP Act and Health Records and Information Privacy Act 2002 (HRIP Act) Act, council should keep these personal details on file for no longer than the purpose for which it is required, dispose of it securely, and protect against loss, unauthorised access, use, modification and disclosure.
Appendices
Appendix one – Responses from councils and the Department of Planning, Industry and Environment
Appendix two – Advice from the Crown Solicitor
Appendix three – About the audit
Appendix four – Performance auditing
Copyright notice
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Parliamentary reference - Report number #339 - released 17 August 2020