On the Infrastructure Levy

A criticism often levelled at governments is that policy formulation does not look beyond the short-term and so when something of a long-term, potentially transformative nature is mooted it is only right that it be given fair consideration. Such is the case with the Infrastructure Levy (IL), the framework for which is included in the Levelling Up & Regeneration Bill, and which proposes to replace the current system of developer contributions with a mandatory, “more streamlined”, locally-determined levy.

As was pointed out in many of the responses to the consultation on the technical aspects of the levy, the development industry is entirely sympathetic to efforts to both optimise and streamline developer contributions through the planning system, but, alongside an unprecedented coalition of cross sector partners, raised a number of concerns about the IL proposals.

Firstly, the levy would further diminish the ability to draw a direct line between new development and the benefits that it can bring for existing and future residents, which is critical to fostering more positive attitudes towards new build housing.

Secondly, at a time when the industry is already facing unprecedented threats from a combination of economic uncertainty, the increasing burden of regulation, including nutrient neutrality, and a planning system that could not unfairly be described as grinding to halt, the industry is very concerned about the detrimental impact of such a major overhaul to a system that, as the consultation material notes, already secures developer contributions worth around £7 billion per annum.

Most fundamentally, however, for the reasons set out below, claims that the IL that it will deliver more funds for communities and at least existing levels of affordable housing do not stand up to scrutiny.

The consultation material stated that the “government wants to make sure that local authorities receive a fairer contribution of the money that typically accrues to landowners and developers”.

Whilst imperfect, it is important to recognise the benefits that current forms of land value capture are securing. Savills estimated in 2018 that around 50% of land value uplift is captured via developer contributions, once the costs of site remediation and enabling works are taken into account. This is before a landowner even pays tax on any subsequent land transaction.

The consultation material also stated that the proposed levy “will support funding for the infrastructure – affordable housing, schools, GP surgeries, green spaces and transport infrastructure to support connectivity that local communities expect to come with new development”, but there is evidence emerging across the country that Community Infrastructure Levy (CIL) being collected by districts is not being passed to the county for investment in such facilities.

Whilst there are provisions in legislation preventing CIL from being spent on anything other than infrastructure, there are no mechanisms for ensuring that revenue raised through CIL is transferred to county councils, or that any of the revenue raised through CIL is actually spent at all. In 2021, for example, Property Week found that local planning authorities (LPAs) in London alone were sitting on at least £1.29bn in unspent developer contributions.

It is understood that as of April 2023 there are 158 CIL charging authorities (down from 163 due to local government reorganisation), which represents only 51% of LPAs with a CIL in place.

The fundamental issue with CIL is that it is not a mandatory requirement. If it were, it is likely more of the gremlins associated with it would have been ironed out by now and the skills required to promote and adopt one would be more prevalent.

With regards to Section 106 Agreements (S106), the consultation material states the proposed levy will “largely sweep away the sometimes-protracted negotiation".

While some negotiations can be protracted because of their complex, strategic nature, as a 2020 report on ‘The Incidence, Value and Delivery of Planning Obligations and Community Infrastructure Levy in England in 2018-19’ identified, a distinction can be drawn between unavoidable delays and avoidable delays.

The negotiation of the agreement, an unavoidable delay, could be expedited by expanding the scope of planning performance agreements to involve statutory consultees all the way through the process and to make the scope of, drafting, and execution of an agreement key milestones within the project timeline.

Some proponents of the IL point to the extent to which S106 are subsequently renegotiated, often as a result of purported ‘overbidding’ for land, as a justification for a mandatory, non-negotiable up-front figure. Evidence for such assertions about the scale of this perceived problem would be interesting to see. The aforementioned report identified that most LPAs received only a small number (four or fewer) of requests to amend a S106 each year and Planning Practice Guidance has been amended to make clear that where viability assessments are used to inform decision making under no circumstances will the price paid for land be a relevant justification for failing to accord with relevant policies in the plan.

Avoidable delays could be reduced by, for example, reducing reliance on locum solicitors that start each agreement from scratch by adding greater internal LPA resource and the wider use of standard template agreements.

Other issues like the opaqueness and uncertainty of how and when funds are collated and spent and by whom could also be readily dealt with accessible policies and effective monitoring arrangements, perhaps expressed by way of a development plan document on developer contributions and the greater use of Infrastructure Funding Statements.

It was reported in April 2023, for example, that West Northamptonshire “does not have an overall picture of developer contributions worth millions of pounds and communities could be missing out”.

The present system includes relatively high thresholds for developer contributions, significant testing at the plan-making stage and an acknowledgement that those thresholds may or may not be met subject to more detailed viability assessment once a planning application has been submitted. It is expected, however, that every site will deliver an optimum, policy-compliant contribution.

Since the IL proposals will operate as a fixed charge it will be impossible to set an IL rate (or set of rates, see below) that will not either render otherwise deliverable sites unviable, or result in a significant volume of sites paying less IL than they could deliver. The output from the IL will, therefore, and as a point of principle, inevitably be lower than the amounts of affordable housing and CIL that could be delivered by the current system.

In a letter to the Secretary of State in February 2023 the National Housing Federation and a number of other bodies in the planning and development sectors highlighted that almost 50% of all new affordable housing is funded through S106 and that, under the levy as proposed, it is possible that developer contributions could be diverted away from delivering affordable housing to other unspecified forms of infrastructure or local authority spending priorities.

Notwithstanding the scale of affordable housing delivery, it has not, in principle, been part of the CIL regime because in the interests of creating mixed and balanced communities it has been considered better to integrate it as part of a development rather than by contribution. The levy as proposed would deviate from this important placemaking principle.

Under the IL proposals as drafted neither the builder nor the provider of the affordable homes will know how much of the latter the LPA will be able to secure until the scheme is at an advanced stage of preparation and possibly even construction and so the affordable element will need to be shoe-horned into a scheme.

An additional justification for the proposed levy is that it will be a more efficient system, but securing agreement to the inputs to rate-setting during an examination will be extremely challenging.

Setting a CIL rate of what is typically a few hundred pounds is complicated and contentious already, but the complications and contentiousness would be shown to be modest compared to what would need to be rates in the thousands of pounds for the proposed levy to support both infrastructure and affordable housing requirements.

CIL is typically only collated by way of a handful of charging rates. The proposed levy would require a multi-dimensional triangulation of charging rates to account for different uses of different scales (e.g. building heights) in different parts of an authority with different existing and benchmark land values and different costs and revenues and margins. On that basis it does seem outlandish that the number of rates required could run into the dozens.

A further justification for the proposed levy is that it will provide additional funds to local communities. The consultation material itself concludes, however, that the proposed levy is best suited to uncomplicated greenfield sites in higher value settings and that, in other contexts, particularly brownfield developments, LPAs would be offered far less flexibility in the identification of a rate that would maintain development viability.

The consultation further notes that, according to research conducted in 2020, 53% of funds raised by CIL are raised and spent in London compared to just 3% in the North East. The proposed levy might, therefore, capture more value from greenfield sites in the South East, but, as the accompanying report notes, “it is likely that a shift to the IL would reinforce the geographic inequalities already evident in the current system”.

The IL would be introduced over an ‘extended period’ and through a ‘test and learn’ approach, which would see the proposed levy introduced in a representative minority of local authorities in the first instance (that would presumably be afforded the not insignificant resource likely to be required to commit to such an undertaking). This sounds sensible in principle, but the impact on inward investment in that representative minority would need to be closely monitored because an even more uncertain policy environment in those places may be detrimental.

A 2018 HCLG Select Committee report on land value capture concluded that:

“It is clear that any new approach should have cross-party support, with the intention of being retained for the long-term and should be simple to administer, without complicated exceptions or viability processes.”

Based upon the exploration of only the key matters of principle above, it cannot be said that the proposals would meet those criteria.

It has been not unreasonably suggested that the perceived deficiencies with the present S106 and CIL regimes would be dwarfed by the vast operational, structural and procedural challenges that the IL would introduce, and that the time, cost and effort required in pursuit of the latter would be better directed to remedying the former.

If reform is to be pursued in this area then the work of the 2016 CIL Review Group could be revisited. The Group recommended that CIL and S106 be replaced by a Local Infrastructure Tariff, with a Strategic Infrastructure Tariff at a housing market area or combined authority geography. If reform in the way that infrastructure is funded is to be pursued, then this could be an avenue to explore, but a system for developer contributions can either be simple or it can optimise delivery. It can never fully satisfy both.