Businesses applying for resource consents are to receive compensation if their applications are delayed by the council.
Under a new scheme, applicants will get a discount of 1% for each working day their application is delayed, to up to 50% of the total fee.
Under law, councils must normally process resource consents in 20 working days.
Environment Minister Nick Smith says the scheme is designed to encourage council response times.
Local Government New Zealand says the penalty regime is flawed.
LGNZ says a penalty system will work well for "tick-the-box" consents like building a garage. But it will not work for large projects, such as a hydro-electric scheme.
LGNZ says it will create expensive legal conflicts as councils haggle with applicants about who was responsible for delays.