Requiring developers to provide financial or in-kind contributions as part of their planning approvals is justifiable on one or more of four grounds.

Firstly, a development contribution might be required to avert an unanticipated adverse effect on local infrastructure or amenity.  For example, the area of hard paving proposed in the development might cause excessive stormwater runoff which would overload local drainage networks and threaten flooding of neighbouring properties.  In these circumstances, it would be reasonable to require the proponent to pay 100% of the cost of building an off-site retarding basin, or some other engineering solution, to manage the runoff.  This type of contribution is sometimes called an ‘impact mitigation payment.’

Secondly, a ‘cash in lieu’ payment could be required of a developer to enable the Council or other approval authority to provide an amenity or facility off-site which would otherwise be required on the site of the development.  An example is where a proponent pays for all or part of their parking requirement to be provided elsewhere nearby.  Other inclusionary requirements, such as public open space provision and social and affordable housing, can be dealt with this way.

Thirdly, there are ‘user pays’ contributions.  These require proponents to meet their pro-rata share of the cost of new local infrastructure – such as roads, drains and community facilities – which will be used by the occupiers of their projects.

Finally, the proponent may be required to pay the equivalent of a ‘licence fee’ to undertake the project.  A development approval or town planning permit will carry a financial value in its own right.  A piece of land accompanied by a permit for a more remunerative use will be worth more than an otherwise similar piece of land which lacks planning permission.  (The owner of this alternative piece of land may suppose that they too can secure permission, and therefore impute a similar value to their plot, but this is technically speculation on their part.  Planning rules can change at any time; only a permit provides a legal right that can be the subject of a financial compensation claim if rescinded.)

Permits have a financial value partly because access to development rights is deliberately rationed in the town planning system so as to achieve economically superior urbanization compared to allowing a free for all.  In this sense, development permits are comparable to say, commercial fishing licences, or liquor distribution licences.  Securing either of these attracts a regulatory fee which reflects the value of the commercial opportunities on offer to the licence holder.

Development permits can also be likened to mining licences.  In Australia, rights to develop land are reserved – or owned – by the Crown (the State) in the same way as minerals belong to State and not the owners of the land under which they might sit.

The value of development rights is given by the difference between what a developer would pay for a site for a project complying with those rights and the value of the site under its existing use or the best alternative that can be undertaken without permission.  What the developer is prepared to pay will be the residual after they have deducted all their project delivery costs, including their margin for profit and risk, from the total revenue they expect to generate from the completed project (see diagram).

For a development licence fee to be efficient, it would need to be set at a level which would not distort or deter development.  A premium above existing use value would need to be ‘left on the table’ for the owners of development sites so that they might retain an incentive to release their land to bona fide developers.  In the ACT, Australia’s only jurisdiction with a comprehensive development licence fee system, levies are set at 75% of the uplift in value between post approval and existing use.

The precise value of development rights will be location, site and project specific.  The same project undertaken in a more sought after area – where end user prices per square metre are relatively high – will likely generate a higher land value uplift in absolute terms, so that a 75% licence fee will produce more cash.

Licence fees can be assessed on a case by case basis to allow for nuances in location and site conditions.  This poses administrative challenges.

However, as has been done in the ACT scheme, it is possible to ‘codify’ development licence fees by precinct and land use type, based on modal conditions in achievable prices for finished product and existing use values.  That is, average projects in each precinct are used to generate typical value uplift conditions and these are used to establish the nominal value of development rights per square metre of floorspace.  These are compiled into schedules which are adjusted annually to reflect price movements.  Proponents can pay these scheduled fees rather than going through their own before and after valuation study.

In some jurisdictions, this codification approach has been used in conjunction with floor area uplift schemes to work out the dollar value of the community benefit expected of proponents when they seek additional height or density versus a benchmark in a planning scheme.

Mostly, however, approval authorities extract a de facto and informal development licence fee.  They try to negotiate offsetting benefits for the community in successive development assessments, regardless of whether the proponent is seeking to exceed design parameters set out in a planning scheme.

The four development contribution types are additive; in some circumstances, a proponent could reasonably be required to make all four types of contribution for the one project.  Although they have their separate and robust conceptual justifications, all the contribution types are subject to the law of gravity in property economics; they are factored into the proponent’s project delivery costs and reflect in a reduced residual land value.

A broad based and codified licence fee offers the potential to radically and efficiently simplify the development contribution system.  While impact mitigation payments will always need to be assessed on a case by case basis, a licence fee could subsume the functions of inclusionary requirements and user pays charges.

Offsetting the revenue lost from abolishing inclusionary requirements and user pays contributions would be an increase in licence fee receipts.  The offset would be less than one for one, because only a proportion (say 75%) of the increase in residual value arising from the abolitions would be captured.  That said, both proponents and approval authorities would be relieved of complex compliance costs attaching to development contribution plans.  Furthermore, the licence fee receipts would be returned by all development, not just projects in specified development contribution precincts.  Total available revenue for investment in infrastructure and services would likely increase substantially, and this without distorting or deterring housing and other development.  An important additional benefit is that licence fees would automatically rise in areas which benefit from major infrastructure projects such as metro lines and tram extensions, largely obviating the need for separate and partial value capture arrangements.

Simplicity and transparency would be the hallmarks of a broad based development licence fee to help pay for infrastructure to support urban growth and change.  Proponents would readily discover their full, non-negotiable, liability for development contribution by looking up a schedule of fees per square metre for different types of floorspace broken down by a suitable geography, say, the ABS’s SA2s.  The schedules could be operated by State revenue offices rather than planning institutions to avoid conflicts of interest and to streamline administration.

Even if reform stopped short of retiring user pays charges and inclusionary provisions, the institution of a universal development licence fee to divert the lion’s share of residual value to infrastructure provision would be a welcome advance.

Dr Marcus Spiller, Principal & Partner, SGS Economics & Planning Pty Ltd

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