Principlesfor Setting Developer’s Contributions for Urban Water Infrastructure

ReportNo WSAA 103

March 1996




The study has developed a set ofguidelines for determining the level and structure of developer charges inAustralia which take into account the multiplicity of objectives that waterutilities face. These guidelines are applicable to water utilities withdiffering institutional arrangements and varying catchment characteristics.

The recommended principles havebeen summarised in terms of a financial model that recognises systemcomponents, the asset value and timing of construction. It also containsmechanisms for allocating hydraulic infrastructure costs to customers, whilerecognising all potential revenue and expenditure streams.

The guidelines for settingdeveloper charges are summarised below.


Role of Upfront (Developer) Charges

Coverage of Developer Charges

The costs of water supplyheadworks, such as dams, groundwater extraction bores or treatment facilitiesshould be excluded from the calculation of developer charges.

The major role of developercontributions is to recover the initial capital costs of providing hydraulicinfrastructure services to new developments. It is inappropriate to recovermaintenance and asset replacement expenditures from developer charges, giventhe uncertainties about the timing and amount of these costs (see 4.5).

Calculating the Cost of Hydraulic Infrastructure

Past and Future Costs

In order to reflect the economiccosts of hydraulic infrastructure services to new customers, the capital costof hydraulic infrastructure should be calculated on the basis of allexpenditures (both past and future) incurred in providing services to newcustomers.

Inclusion of the Time Value of Money into DeveloperCharges

Water utilities shouldincorporate the time value of money into their calculation of developercharges.

Allocating the Costs of Unplanned Excess Capacity

Water utilities should notattempt to recover more than the infrastructure is worth. In some cases, this maybe less than the initial capital cost of the hydraulic infrastructure. If theprovision of uneconomic infrastructure resulted from misplaced planningforecasts, these costs should be borne by the utility.

Asset Valuation Issues

Over-valuation of the assets ofthe water utility will raise the level of developer charges and increase thecost of development. This will tend to result in a marginal reduction inactivity in the development industry.

Community Service Obligations (CSO’s)

If water utilities are unable toobtain funding from governments for CSOs, the assets required to meet the CSOshould be written down to a level required to reflect the income earningpotential of that asset(s).


Determining the Level of Cost Recovery

Financial Modelling Approach

In order to avoid the ‘doubledipping’ of customers, water utilities should undertake a comprehensivefinancial assessment of new development in order to ensure that the presentvalues of all revenues (ie developer and recurrent charges) obtained from thecustomers in new developments is matched to the costs that they impose on thehydraulic system (see 7.2).


Who Should Pay Developer Charges in the First Instance

There are good efficiency andequity arguments for levying capital charges at each stage of the landdevelopment process. Recovering capital charges from landowners may ensure thatintergenerational inequities are minimised, whereas charges at the sub-divisionand building stage are consistent with the ‘user-pays’ principle (see 7.3).


Differential Developer Charges

Location Based

In general, developer chargesshould be structured to reflect locational differences in the cost of supplyinghydraulic infrastructure.

Urban Consolidation

Developer charges levied on re-development or infilldevelopment should pay a charge below that of Greenfield sites if any of thefollowing considerations are important:

·        Established areas have considerable excess capacity;

·        Possibilities for the re-development are plentiful;and,

·        Developer contributions in excess of the incrementalcosts of re-development greatly affect the re-development of established sites.(see 7.4.3)


Premature development imposes additional real resourcecosts on the water utility, and may cause the utility to reject investments onprojects which provide a more immediate and less risky return. Water utilitiesshould ensure that developers of non-contiguous development (“non-frontal” and“pioneer”) should fund the full cost of providing all the infrastructure,including that which is in excess of developer’s immediate requirements (see7.4.4).

Land Area

Water utilities should use developer charges toprovide incentives for more compact development.


The most equitable approach to the allocation of thecosts is to set them on the basis of the benefits that developers receive froma particular investment.


Accounting For DeveloperCharges

Treating Developer Chargesas Income

The income received from developer charges should beincluded as income in the financial statements of the water utility.


Hydraulic infrastructure eitherprovided or funded by developers should be included in the asset base of thewater utility for depreciation purposes.

Rate of Return Calculations

Developer ‘provided’ and ‘funded’infrastructure should be excluded from the value of the water utility’s assetstock when making rate of return calculations.


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