In this paper, we outline an innovative approach to value capture to fund infrastructure, affordable housing and more sustainable cities.

We propose that developers should be charged a licence fee for the ‘development rights’ they receive through planning approvals. This would be similar to the fees charged for access to other government regulated markets, for example, liquor distribution, commercial fisheries and broadcasting bands.

Development licence fees would be calculated on the uplift in value generated through more intensive use of land made possible by development consents or rezonings.

As price takers, developers would pass the cost of the licence fee back to the sellers of development sites. Provided the licence fees are set at an appropriate level, they would leave “enough on the table” to motivate landowners to sell to developers. The scheme would, therefore, raise revenue for government without dampening housing or other construction activity, and would not put upward pressure on housing prices.

Potentially, the system could raise more than half a billion dollars per year in Victoria alone. If part of this revenue was shared with local governments, councils would have an incentive to promote development and combat NIMBYism (not in my backyard). This would improve the supply of development sites for housing, easing the affordability problem.

A development licence fee system would complement rather than overlap with other value capture mechanisms such as standard State Land Taxes or special benefitted area levies connected with infrastructure projects. Changes in these taxes and levies would be factored into development feasibilities and therefore affect residual land values. Development licence fees would adjust accordingly.