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ipart submission-05-05-04

ipart submission-05-05-04

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Published by Core Research

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Published by: Core Research on Jan 09, 2009
Copyright:Attribution Non-commercial


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Economically Appropriate Rents for
Crown Land with Pre-existing Broadcast
A Report on behalf of Broadcast Australia
Joshua Gans

The analysis here represents the views of CoRE Research Pty Ltd (ACN 096 869 760) and should not be construed as those of Broadcast Australia.

May 2005
Executive Summary

In its review of rentals for Crown land communications tower sites, IPART is considering rental fee methodologies that (i) apply rents to co-users as well as primary users of sites and (ii) that are adjusted for the \u2018strategic\u2019 importance of sites. In so doing, it is proposing rental methodologies that are not purely based on cost. That is, the rents may have a premium attached to them above the value of the next best alternative use of the land.

The idea that rents should be paid by co-users as well as primary users is not justifiable from an economics perspective. First, co-users cannot generate any value from use of the land if the primary user\u2019s tower (and related activities) is not present. Hence, those functions are strict complements and so charging co-users represents a direct rental increase not justified by changes in market conditions. Second, by imposing rents on co-users, the government would fundamentally change the pricing options in this industry. In effect, each co-user would face additional costs in utilising a tower on crown land. This could cause them (a) to reduce their usage of such towers and (b) to substitute their usage to towers not on Crown land. In either case, this would violate the objectives of maximising site use and minimising site proliferation.

Adjustments to rents based on strategic importance \u2013 that is, the benefits to users from a particular site \u2013 are, in fact, a tax on the industry. Imposition of taxes are usually justified on economic efficiency grounds \u2013 correcting a market failure \u2013 or distribution grounds \u2013 as a non- distortionary means of raising general government revenue. Neither of these grounds holds in this case:

\u2022Efficiency: there are no obvious market failures that require a reduction in the usage of

telecommunications towers \u2013 either generally or by specific users \u2013 that would justify a tax that may do just that. Moreover, to the extent that there are environmental concerns, these have nothing to do with the user benefit from a site but from the costs of utilising a site.

\u2022Distribution: the investment and utilisation of crown lands for telecommunications sites

is unlikely to be inelastic in the long-run. As such, the government runs the risk of significant distortions to economic and commercial behaviour from raising revenue in this manner.

Absent these usual justifications, claims to raise rents on the basis of \u2018strategic importance\u2019 appear to amount to \u2018hold-up\u2019 by the government. In the classic \u2018hold-up\u2019 problem, having invested in sunk assets and, therefore, finding it very costly to switch sites, the land owner has moved to appropriate some of the value from the broadcast industry. In the extreme, user- based charging of rents amounts to the government taking a long-term equity position in that industry without the contribution of productive services. This is exacerbated by the notion that co-user pricing will be, in some sense, managed by the NSW government. This will likely discourage any investment in improvements in Crown land in NSW; regardless of intended use \u2013 towers or otherwise. If the government wishes to raise taxes on the citizens of NSW, there are probably more efficient and less distortionary means of doing so.

Finally, given the intention to convert the management of Crown land assets into a Public
Trading Enterprise, these proposals appear to violate competitive neutrality. Put simply, very
little Crown land is rented on a basis other than alternative use cost and, moreover, two towers
operating adjacent to one another on Crown land could face very different rents.

The basis for charging rents on Crown land should be based solely on its unimproved value in its next best alternative use. This is likely to be similar to commercial rents on adjacent properties (or an independent land valuation) plus an additional amount if there are environmental issues.

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