Case study

Let’s say you sell widgets. You’ve sold them for a long time. Every year you earn about one per cent of the value of each widget sold. But suddenly, your costs are spiralling upward. You increase your cut each year, but it is still not enough. So you decide to add a couple of big fees at the front end—when you first sell your widget.

Your customers balk. They stop buying your widgets—at least not nearly as many as they once did. They buy your competitors lower-priced widgets instead. You tell yourself you make a better widget—the market will come back. But you continue to bleed market share.

So, against the advice of your finance department, you discount one of the two front-end charges. You leave all other charges intact. That is your compromise. You are still far more expensive than your competitors, but it is the bargain you strike.

Three years later, some customers have returned. But your cost disadvantage continues to enable your competitors to eat away at your market share. What do you do? Raise your fees? Leave them as is? Or cut fees? Or do you look at your cost structure to determine why they are spiralling upward?

This is the dilemma facing council this week.

Its finance team really wants council to raise these fees. Significantly. Specifically, they want to remove the discount applied to development charges—the front end, one-time fee on the sale of new homebuilding lots. In 2013, the discount was established to stimulate investment in new homebuilding in the County.

The County’s finance folks argue that it didn’t work. They note that just 10 more new homes were built in 2015, taking advantage of the discount, than were built in 2012—the last year the full development fee was charged. There was insufficient payback, they argue, from the increased tax base to offset the revenue it would have generated had the full development charges been in place.

It is a point of view. It has its own internal logic and reasonableness. But it is absent one crucial and fundamental element— the marketplace. Buyers are the final arbiters of price. When it’s too high— they simply won’t buy your product. They buy your competitors’.

That is what has happened since Prince Edward County adopted eye-watering development and water connection charges in 2008. The County’s consulting economist, Andrew Grunda, assured council then, that while this municipality was making itself the most expensive place to build in the region—that it need not worry. Our neighbours in Quinte West, Belleville and Napanee would soon catch up with us when they conducted a similar review.

But that didn’t happen.

Those councils understood they operated in a competitive marketplace—that to maintain and grow market share in the important business of new homes (and grow their tax base) they had to keep development charges and connection fees at a competitive level.

So these councils declined their consultant’s advice.

The brutal fact is that even with discounted development charges, Prince Edward County remains among the most expensive places to build outside of the GTA. In Quinte West, the combined development and connection charge is $7,669 for new single detached home. This compares with $9,614 in Belleville. That city provides a further discount to encourage new home construction in designated areas.

In the County, the combined development and connection charge is $18,362. That is the discounted rate. Should council agree to drop this discount next month—the combined fees will top out at about $21,000 per new home.

But wait, there’s more. Grunda, the hired economist, has recently advised council that that the County’s waterworks finances are so bad, he believes connection charges will have to rise substantially— from about $13,000 currently, to $14,000 and then $18,000 within five years. If council goes along with this recommendation, new home builders will be looking at spending about $27,000 before they pay for their building permit. Before they even dig a hole.

Of course, they won’t. They will build elsewhere. Only those for whom costs don’t matter will be allowed to build a home in Prince Edward County. That has its own costs. In the meantime, existing taxpayers will have to bear an ever-greater share of the burden of the costs of municipal services.

Then, of course, there is the pledge made to the development community—the homebuilders and trades —last November.

Mayor Robert Quaiff had assembled a roomful of these folks one evening to say that the County was open for business—that he wanted them to come and invest in the County.

He and the councillors present assured them they were listening.

If, however, just a few short months later, council decides to ratchet up the fees it charges to these builders—beyond anything comparable in our marketplace— it will be communicating loudly and clearly that rather than being open for business, it is business as usual at Shire Hall.

This investment will go elsewhere.

rick@wellingtontimes.ca