New Zealand Engineering 1999 June

Infrastructure

Financial Contributions for Drainage Infrastructure Funding - some technical issues

Defining the level of service
Assessing development impacts
Apportioning impacts and costs between beneficiaries
Phasing of capital works and the collection of financial contributions

A number of Territorial Local Authorities have provisions in their District Plans for the collection of financial contributions, otherwise known as impact fees or system development charges, to fund drainage infrastructure expansions and upgrades.

A fundamental principle in the application of financial contributions is that a "rational nexus" or logical connection must exist between the work being financed and the party contributing to the cost of that work. The new development or beneficiary must cause a demand for the new works, and the financial contribution must represent the development’s fair share of the total cost of those works.

Situations like this understandably lead to close scrutiny of the technical information on which the costs and cost sharing are based. In the context of drainage infrastructure (stormwater and wastewater) this raises a number of technical issues in relation to the definition of level of service, the assessment of development impacts, the apportioning of costs between beneficiaries, and the phasing of capital works.

Defining the level of service
In greenfields situations the need for new infrastructure is obvious, however, in situations where new development will share existing, infrastructure then establishing the first of the rational nexus criteria becomes more difficult. The desired level of service or performance standard sets a benchmark for the performance of the existing infrastructure and hence defines whether or not the new development causes a demand for new or upgraded infrastructure.

A risk associated with committing significant funding to drainage infrastructure is the uncertainty in the long-term service requirements. A planning horizon of several decades is normally required, since drainage infrastructure typically has a long useful life. For stormwater drainage systems there is always some uncertainty in the actual level of service being delivered since it is only occasionally tested to capacity. Further, assessments are often based on flow estimates extrapolated from short data sets.

In the absence of national standards specifying the minimum level of service required for drainage infrastructure, it is left to asset managers and the community to decide what is appropriate. Drainage infrastructure by nature is not readily adaptable, and making marginal changes in the level of service once it has been constructed is not usually cost effective nor practical. It is therefore important that the correct decision be made at the outset.

The level of service for both performance (eg. discharge capacity) and also asset condition (eg. structural integrity) should be specified. The latter is necessary so that the asset replacement period can be defined and an appropriate (consistent) discount period used for calculating annualised costs for new works.

Assessing development impacts
In situations where the district plan permits flexibility in the type and mix of development allowed within a particular catchment, then a large number of alternative development scenarios are theoretically possible. This is not usually a problem for the assessment of stormwater requirements in highly urbanised areas because "footprints" and the degree of impermeability which are the primary factors affecting stormwater runoff do not change significantly as a consequence of further site development. There can, however, be significant variability in the wastewater discharge characteristics depending on the particular mix of land use that evolves. This makes for difficult infrastructure planning and hence some uncertainty in what the actual development impacts could be.

The methodology used to assess the performance of the existing and upgraded infrastructure must be consistent with the method used to apportion costs between and amongst existing and future development. Dynamic numerical hydraulic models in conjunction with appropriately designed field monitoring programmes afford sophisticated analyses of performance. For example, it is now routine practice to represent user-specific demand patterns within wastewater models so that not only are peak flows and daily volumes represented accurately but so too is time of use. It is therefore possible to define logical "units of impact" for calculating financial contributions, because the tools exist with which to assess development impacts accordingly.

Apportioning impacts and costs between beneficiaries
For situations in which existing infrastructure is to be utilised by both existing and future development, the following three scenarios should be considered in order to meet the requirements of the second part of the rational nexus test:

a) Status quo (ie. existing land use and population with existing infrastructure)

b) Infrastructure expanded or upgraded to meet the desired level of service for existing land use and population (ie. existing level of development), and

c) Infrastructure expanded or upgraded to meet the desired level of service for existing and future land use and population together (ie. future level of development, typically Maximum Probable Development or MPD).

The total cost of providing infrastructure to meet the needs of both existing and future development is equal to the cost of scenario c). Assuming that the existing infrastructure is deficient in some way, and does not meet the desired level of service even for the existing level of development, then the cost required to move from a) to b) should be borne by existing users only. The marginal cost required to move from b) to c) is the cost associated with growth and therefore represents the financial contribution that should be collected from future development.

Studies of infrastructure performance generally base upgrade requirements on some future development scenario, typically MPD. This is because drainage infrastructure has a long useful life, typically 50 or more years, and it is sensible to cater for future development when undertaking upgrading works (ie. scenario c). In the past the marginal cost of catering for this predicted future growth has not normally been assessed as a separate component of the total upgrade cost because this information has not been relevant. Many territorial local authorities will therefore discover that their Catchment Management Plans, even those prepared recently, will not readily allow financial contributions to be calculated because scenario b) has not been assessed and reported.

In order to deal adequately with the second part of the rational nexus test, the assessment of financial contributions should account for the particular drainage characteristics of both existing and future development. The "time of use" becomes an important consideration, particularly where there are mixed land uses sharing the same infrastructure, and is an aspect that may become more relevant to the water industry as a whole¹. The traditional design approach for wastewater collection systems which utilise peaking factors and assumes simultaneous peak flow, may not be rigorous enough to support the calculation of financial contributions unless the time of use is also considered.

The opportunity exists for wastewater drainage systems, and to a lesser degree stormwater drainage systems, to be managed in a way that attenuates peaks and hence reduces infrastructure requirements. The associated cost savings would be reflected in the value of the financial contributions collected from individual beneficiaries, accounting for their individual discharge characteristics. The introduction of financial contributions may encourage users of drainage infrastructure to modify the characteristics of their discharges and to apply demand management techniques, such as on-site detention.

Phasing of capital works and the collection of financial contributions
As noted previously, it is not usually cost effective nor practical to make frequent, marginal increases in the level of service in order to accommodate growth. As a consequence, drainage infrastructure is rarely expanded or redeveloped in small increments. Of the various approaches available for collecting financial contributions, the recoupment cost approach is probably most appropriate for infrastructure which has been expanded or upgraded to cope with forecast MPD or ultimate development. Each new development repays the asset owner for the cost of installing infrastructure with excess capacity to cope with the growth that was forecast at the time the infrastructure was upgraded. In essence, each new development buys a share of the excess capacity.

The recoupment approach requires accurate forecasts of the rate and ultimate level of development so as to provide confidence that the apportionment of costs between the existing development and the various as-yet unidentified future users is fair. Ideally, ultimate development (or MPD) is attained at the same time the excess capacity is exhausted. If the forecast level of ultimate development proves to have been over optimistic then the infrastructure will have an excess capacity that is not needed, and the financial contributions collected from past new developments will be insufficient to fund all of the growth component.

The use of financial contributions may encourage developers to take an active interest not only in the nature and cost of the particular works they are expected to co-fund but also the timing of their implementation. The implementation priorities of the asset manager may differ from those of the private developer, since the former will take account of city or district-wide priorities. Differences in opinion may arise when upgraded infrastructure is required immediately to service a proposed new development, but the asset owner having agreed in principle to fund the "existing use" component can not justify doing so in the short term given other priorities.

The challenge of providing technical information to support the calculation of financial contributions will rest with the engineering profession. It will most likely require a more rigorous approach to the way we assess the performance of drainage infrastructure.

Gavin Palmer is a senior engineer with City Design, Auckland

Reference

1. "Government’s Terms of Reference for the Water Review", Water and Wastes in New Zealand, New Zealand Water and Wastes Association, January 1999, pp12-13.