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Meeting the policy challenges of rural and peri-urban land use in Australia: Government, governance and public policy

5. Policy instruments

A range of policy tools are available to governments to meet the challenge of maximising the total value to the community created from land use. These tools include regulation, information-education-suasion, market based instruments and public provision. The following section discusses these policy tools and uses examples to demonstrate how they have been applied to meet land use objectives. While it is not within the scope of this paper to discuss in detail the governance arrangements that support these policy tools, the examples demonstrate how different approaches assign decision making authority between individuals, agencies and governments, and give varying degrees of flexibility and autonomy to land users in meeting public policy objectives.

5.1 Regulatory tools

Regulatory tools directly prescribe or prohibit processes or outcomes to achieve policy goals. These tools are often embedded in legislation and regulation. In Australia, state and local governments commonly use regulatory tools, such as land use restrictions and zoning, to regulate land uses in particular areas. Examples of regulatory tools applied in Victoria include an Urban Growth Boundary (described in Box 1) and Green Wedges (described in Box 2).

Box 1 – Urban Growth Boundaries
An urban growth boundary (UGB) is used to physically separate rural and non-rural land uses where ‘the government effectively draws a ring around a city and outlaws urban development outside this ring’ (Brueckner 2007). The objective of a UGB is usually urban containment and conservation of the surrounding peri-urban and rural environment (Corkindale 2004).

A UGB was introduced for the city of Melbourne in 2002 as part of the planning strategy Melbourne 2030. Objectives of Melbourne 2030 included: a more compact city, to minimise speculation on the fringe and retain open land close to most development areas (Department of Sustainability and Environment 2005b).

Cited benefits of UGB include (Department of Sustainability and Environment 2005b):

Greater predictability in planning for infrastructure providers and investors
Ease of understanding where urban development will and won’t be permitted
More orderly development of land
Discouragement of unnecessary extension of community infrastructure
Preservation of important qualities of rural areas (environmentally sensitive areas, agriculturally productive areas).

Cited costs of UGB include (Pallisco 2008, Brueckner 2007):

Decreased affordability of land within the UGB (a benefit for existing landowners)
Decline in land values outside of the UGB.

Whether or not the benefits of UGB outweigh the costs has been subject to debate. For example, it may be that house prices are higher as growth controls have resulted in environmental improvement for which people are willing to pay, and this has been capitalised into house prices. However, some empirical analysis has suggested that growth controls have resulted in higher house prices and these are only partly, if at all, a consequence of environmental improvement (Evans 2004).

In Melbourne, a number of developments have been submitted for approval outside of the UGB despite the objective of the UGB to encourage development within the boundary (Pallisco 2008). Since 2002, the UGB around Melbourne has been increased three times around designated growth areas to accommodate increasing population and demand for affordable housing (Pallisco 2008). Most recently, the UGB was extended by 43,600 hectares in July 2010 to accommodate the building of an additional 284,000 houses (Department of Planning and Community Development 2010).

Box 2 – Green Wedges

Green wedges are generally defined as open landscapes set aside from development to conserve rural activities, natural features for amenity values and resources. Green wedge and rural conservation zones are used in planning schemes to restrict uses such as excessive subdivision for residential development (Department of Sustainability and Environment 2005a).

The Department of Sustainability and Environment (2005a) describes the role of green wedges as:

Providing opportunities for agricultural uses
Preserving rural and scenic landscapes
Preserving conservation areas close to where people live
Preserving renewable and non-renewable resources and natural areas such as water catchments
Providing and safeguarding sites for infrastructure to support urban areas such as airports and sewage plants
Allowing industries such as sand and stone extraction to operate close to major markets
Enabling the development of networks of open space
Providing opportunities for tourism and recreation.

Twelve green wedges were set aside 30 years ago along major transport corridors and between growth areas of metropolitan Melbourne. These green wedges overlap with areas identified as amenity landscapes and peri-urban regions, encircling the metropolitan boundary of Melbourne (Department of Sustainability and Environment 2005a).

The Victoria Planning and Environment Act 1987 provides enabling legislation for land use planning. The planning authority that manages the day-to-day administration of a planning scheme is usually a local council, and the detail of planning schemes is therefore specific to municipalities. There are 82 planning schemes in Victoria – one for each of 79 municipalities and one each for three Victorian special planning areas – Alpine resorts, Port of Melbourne, and the French and Sandstone Islands (Department of Sustainability and Environment 2010).

All freehold land in Victoria is subject to a planning scheme and is covered by a zone which lists the type of land uses that can proceed without a permit, with a permit or which are prohibited. Types of zones that cover rural and peri-urban landscapes outside of towns include: rural living, rural conservation, rural activity, farming and green wedge zones. Schedules to these zones, specific to each local government area, are used to control the intensity of land use, such as the number of dwellings permitted per hectare of land and minimum subdivision area. In some cases these regulatory tools can place restrictions on the efficient operation of farm businesses.

Regulatory approaches typically generate outcomes by applying the same rules ‘across the board’. An authority may, for example, require all landholders in a particular rural area to take prescribed measures to preserve biodiversity on their land. This can generate benefits where landholders and their land are homogeneous. However where landholders and land parcels are heterogeneous, some may be able to generate high biodiversity benefits at low cost and vice versa. An ‘across the board’ regulation will not recognise the potential to generate biodiversity benefits from those with low cost options and may be a higher cost way of generating desired outcomes than other policy tools, such as market based instruments.

Additional challenges that have been associated with regulatory tools include perceptions that the objectives of regulatory processes are unclear, that administrative discretion in the application of land use regulations can lead to arbitrary outcomes that lack transparency and regulatory processes can be lengthy and favour those with “the deepest pockets and the greatest stamina” (Corkindale 2004, pp. 31).

5.2 Information-education-suasion tools

Information, education and suasion tools can be used to promote land use outcomes in line with community preferences when information is asymmetrically distributed between agents. For example, the total value of land use to the community could be increased if landholders were made aware of opportunities to generate environmental benefits for the broader community and of the means to do so. Extension is a suasion tool that has been used to influence land use change in agriculture, particularly to generate environmental benefits.²⁰

Broad roles for extension in encouraging and supporting land use change include:

To encourage people to trial and, hopefully, adopt new practices that are believed to be in their best interest and that also benefit the environment and therefore the wider community
To raise awareness of other issues and opportunities that may encourage land use change such as the availability of incentive payments
To provide technical information or training about a technology or practice.

Expectations about the effectiveness of extension services need to be realistic. Landholders are unlikely to make substantial changes to practices unless the outcomes sought by government are consistent with their own goals and objectives, including profitability (Pannell 2005). The use of extension as a public policy tool is discussed further in Box 3.

Box 3 – Extension as a public policy tool for land use change

Extension is one of many tools that can be directed at land use change. Pannell (2008) has developed a policy framework for choosing mechanisms that contribute to improved land management, including extension. This framework assumes that landholders will adopt land management practices that generate positive private net benefits provided they are able to learn about those practices. Two rules then guide the use of extension as a policy tool:

That the change being advocated generates positive private net benefits. The practice being advocated should be sufficiently attractive to landholders for it to be ‘adoptable’ once the extension program has ceased. If the practice does not generate these private benefits it will likely be terminated by the landholder once the extension program is completed.
That the change generates positive net public benefits for the community.

If these conditions are not met then alternative public policy instruments may be appropriate, such as positive or negative incentives. If no policy tool generates net benefits then it may be preferable for government to avoid intervening (Pannell 2000, 2008).

²⁰Extension includes the use of communication, education, persuasion, formation of communication networks and other tools to pursue land use change (Pannell 2005).

5.3 Market based instruments

Market based instruments can be used to increase the value to the community from land use by aligning private and public incentives. Market based instruments can provide a private benefit, usually financial, to parties that undertake actions that produce public benefits. Typically they function by affecting prices and returns for participants in markets. If government, for example, wants to generate more biodiversity on private land, a market based instrument may provide a financial reward for landholders that produce greater biodiversity. Market based instruments can take a number of forms including:

Charges and taxes
Subsidies and tax concessions
The specification and allocation of property rights and market creation (Industry Commission 1997).

In general, market based instruments can seek to influence prices or quantities of goods (or bads) in a market. Charges and subsidies are examples of price based instruments, while property rights and the creation of a market are an example of a quantity based (or rights based) instrument.²¹

The selection of policy tool will be influenced by how any policy objective is specified. If, for example, a clear biodiversity goal is set, then the challenge becomes one of ensuring that level of biodiversity is preserved at minimum cost. Alternatively, a given budget could be allocated toward preserving biodiversity – the challenge then becomes achieving the maximum amount of biodiversity with a given budget (Polasky and Vossler 2006).
Market based instruments have two potential advantages over more traditional instruments as they:

Allow heterogeneous landholders and agents to adjust to policy requirements in different ways given their unique activities, structures and opportunities
Create dynamic incentives to find and adopt innovative solutions to reduce the future costs of achieving policy requirements (Whitten et al. 2004).

As a result market based instruments offer the potential to deliver equivalent outcomes to existing regulatory tools at lower cost to landholders, industry and the community. But market based instruments will not be the most efficient policy response for every policy problem. Pre-requisites for the efficient use of market based instruments include:

a supportive broader institutional environment
heterogeneity among landholders and firms
clear policy targets
a sound legal basis for property rights and the market based instrument
efficient mechanisms for monitoring and verification
clear transparent rules for market participants
skills in market based instrument design and implementation (Whitten et al. 2004).

Market based instruments have been used in Victoria in a number of land use applications. Examples of a market based instrument implemented in Victoria include BushTender and EcoTender.²² BushTender is described in Box 4.

Box 4 BushTender

BushTender was developed as a new approach to government ‘purchasing’ the conservation of wildlife and biodiversity habitat from private landholders. The government purchases these goods from private landholders on the basis of three factors:

The biodiversity significance of remnant vegetation – this considers the scarcity of vegetation types and its Ecological Vegetation Classification (EVC) – whether vegetation on a parcel of land is extinct, endangered, vulnerable, depleted and so on. Some land will score more highly on biodiversity significance than other land.
The improvement in vegetation associated with landholder actions – landholders can undertake actions to improve habitat on their land, such as fencing to exclude stock from remnant vegetation, grazing management, weed and pest control and fire-prevention measures. Some actions on some lands will result in greater vegetation improvement than others.
A bid – landholders submit bids that reveal how much they would need to be compensated for protecting and enhancing the remnant vegetation offered into the auction.

Landholders who express interest in participating in the auction are visited by a field ecologist to assess the quality and significance of the native vegetation on their site and discuss possible land management options.

The government has a fixed budget to allocate toward biodiversity enhancement in a given period. After bids are submitted, this budget is allocated to those landholders offering the best environmental value for money in providing habitat conservation. The government then enters into contracts with successful landholders to provide the agreed services, typically over a five-to-ten-year period. Payments, reporting and monitoring take place periodically over the life of the contract.

BushTender has been found to be almost seven times more cost-effective in securing biodiversity outcomes than a fixed-price scheme such as subsidies and tax concessions. A key advantage of auctioning nature conservation contracts in this way flows from the information that the mechanism reveals. Government reveals information about potential improvements in biodiversity resulting from management changes and the conservation status of different areas of vegetation. Landholders reveal information about the cost they face (including opportunity cost) in supplying biodiversity, allowing government to buy from low-cost producers.

Source: Stoneham et al. (2003).

Transferable development rights are another type of market based instrument being examined in Victoria. Ownership of freehold land typically comes with a bundle of rights and responsibilities. Rights can include the ability to use and occupy the land, subdivide, develop and sell. The right to subdivide and develop can be in conflict with other objectives such as providing wildlife habitat or minimising erosion (Walls and McConnell 2007). Responsibilities can include a general duty of care associated with the land, or more specific requirements such as waste management and disposal.

Key components of a transferable development rights include:

separation of development rights from the parcel of land (‘unbundling’)
allowing transfer of these rights from one land parcel to another (Walls and McConnell 2007).

Once the development right has been transferred, the ‘sending’ (selling) landholder is restricted from developing the land, usually by means of a restrictive covenant. The recipient (buyer) of the rights can use them to develop another parcel of land more intensively. Transfer of rights takes place through market transactions. In the United States, transferable development right programs have been developed and applied in 33 states and have preserved some 300,000 acres of farmland, natural areas and open space (Pruetz and Pruetz 2007).²³

Transferable development rights operate within existing land use regulations and offer potential benefits including:

allowing development rights to move to locations where they generate greatest value
providing an additional source of income for rural landholders that can assist structural adjustment.

²¹An additional category of market based instruments have been termed ‘market friction instruments’. These seek to influence behavioural change by improving the functioning of existing markets, for example by reducing transaction costs or improving information flows (Whitten et al. 2004).

²²See Eigenraam et al. (2005) for further detail on EcoTender.

²³The Loi sur la réforme de l’urbanisme (Urban Development) Act enacted in 1976 has facilitated the use of transferable development rights for more than 30 years in France. However, the concept of tradable rights is defined quite differently between the France and the United States due to differences in how land is treated in the legal system (Renard 2007). Renard describes land ownership in Western Europe as based ‘on the indivisibility and absolute nature of land ownership’ where ‘a constraint on the right to make use of a given piece of land is not considered grounds for compensation’ Renard (2007, pp. 42). This interpretation of property law means that the implementation of transferable development rights in the US and France is very different as land is treated as a ‘bundle of rights' in the United States which can be traded (Renard 2007, pp. 43).

5.4 Public provision

Government can prescribe particular land use outcomes directly through public provision. Purchasing or retaining land for use as a national park is an example of public provision of land use for recreational and bequest purposes. In this case the desired land use has the characteristics of a public good. Once provided, it can be consumed by many people and not diminish in quantity (non rivalry), and it is difficult to exclude people from enjoying the park (non excludability) (Stiglitz 1988). This can make it difficult or uneconomic for private markets to supply such goods. In some cases private landholders and potential users can make agreements concerning land use, for example members of the community who wish to enjoy private farmland for recreational camping and fishing can negotiate with a private landholder and come to an agreement. However, as the number of parties to any land use transaction increases the likelihood of such voluntary agreements falls as the transaction costs²⁴ increase (Corkindale 2004). In some cases public provision may assist in overcoming.

²⁴Transaction costs refer to the costs of defining and enforcing property rights and agreements (Corkindale 2004).