The government has been going full throttle for housing growth, but will the struggle to find funding for the infrastructure bring its plans to a screeching halt?
Ever since the government produced its sustainable communities plan two years ago, the cry from developers has been that it won’t work without the infrastructure. Now the returned Labour government is under pressure to lay its financial cards on the table and make development happen.
At the same time, the Conservative-dominated assemblies, buoyed by their party’s success in May’s general election in those areas selected for accelerated housing growth, are not prepared to sanction extra development until they know how improvements to their already overloaded infrastructure will be paid for.
A report published last month by consultant Roger Tym & Partners lays bare the scale of the infrastructure funding challenge facing England’s fastest growing areas. It calculates that the South-east will need £36.7bn of investment over the next 20 years. The neighbouring three counties of Bedfordshire, Essex and Hertfordshire alone will need £18.5bn between now and 2021. The amounts needed for affordable housing (£23.8bn) and transport (£21.7bn) account for 83% of the total of the sum needed. Roger Tym & Partners’ conclusions will make useful reading for the team of Treasury civil servants, led by the director of the Government Office for the South East, that is totting up how much investment will be needed to deliver the government’s growth plans.
Looking for the money
We all know that railway lines, roads and reservoirs can cost a lot of money to build. Take London’s Crossrail for example, which has been six years in the making so far, is scheduled to take another eight years to develop, at best, and still has no definite funding sources for the £10bn it will cost to build. With chancellor Gordon Brown’s coffers looking low, Whitehall’s financial room for manoeuvre looks increasingly limited. Professor Stephen Glaister, infrastructure funding expert and Transport for London board member, says: “Waiting for central government is never going to provide sufficient revenue.”
Ministers have for some time been eyeing up developers’ windfall profits as a painless way to plug the infrastructure funding gap. Deputy prime minister John Prescott regularly harrumphs about what he describes as the “scandalous” way private developers are making a fortune on the back of public sector investment. A study, published last month by Transport for London, shows what he is talking about. It concluded that £2.1bn of increased property values within a kilometre’s radius of Canary Wharf Station could be pinned on London’s Jubilee Line Extension. And although the impact was more muted in already built-up Southwark, even here property owners could thank the JLE for a £78m windfall.
Waiting for central government is never going to provide sufficient revenue
Stephen Glaister, Transport for London board member
The main existing mechanism for tapping development profit is the Section 106 agreement. But while the scope of planning gain has grown ever wider in recent years, the need to negotiate agreements on a piecemeal basis makes it an unsatisfactory, ad hoc system. Section 106 methodology is under review, as is economist Kate Barker’s proposal to create a national development land tax, called a planning gain supplement, (see All routes, page 25). But before either of these can get off the starting blocks, alternative local initiatives to capture land value to finance infrastructure are already emerging.
Beyond Section 106
In a classic display of non-joined-up government, the ODPM has been discreetly encouraging agencies and councils in the South-east growth areas to pilot a local planning gain tariff or “roof tax”, while their counterparts at the Treasury are beavering away at turning Barker’s national proposal into a workable scheme.
Milton Keynes is taking the lead with its plans to slap a flat rate £18,000-20,000 on every home built in the two expansion zones to the east and west of the town. Under proposals drawn up by the Milton Keynes Partnership Committee, the body charged with delivering the town’s expansion, landowners will pay the flat rate rather than having to undertake Section 106 negotiations every time they develop a plot.
The public sector likes the tariff because it offers a reliable and potentially more lucrative source of revenue than the existing system. Isobel Wilson, Milton Keynes council leader, reckons the roof tax will double its Section 106 yield. Although they would be having to pay more, landowners appear willing to sign up to the scheme. Housing consultant Roger Humber, who has been advising landowners, says they are prepared to pay extra because they believe it is the fastest and most reliable route to securing permissions.
Fellow consultant Robin Tetlow believes that it is not only in the new town that the tariff will strike a chord. “Developers are quite keen on the Milton Keynes approach because it gives them some certainty,” he says.
Section 106 and tariffs could not run at the same time – it would be taxing developers twice
John Walker, ODPM adviser
West Berkshire council has already introduced a tariff, and the habit could be catching. Hewdon Consulting’s report for the South East of E E England Regional Assembly recommends tariffs should be introduced throughout the region as part of a wider infrastructure funding package. It proposes that the revenues raised could be ploughed into a rolling fund, underwritten by government and administered by English Partnerships, that would pay for strategically important projects.
Setting the level of local tariffs
The government will reveal what it plans to do about Barker’s recommendation for a national planning gain supplement in the autumn. Meanwhile, the ground rules for the new tariff system are outlined in a consultation paper on Section 106 contributions, published last November, which encouraged authorities to outline a formula indicating the amount of planning gain they would expect on a given development.
Martin Bacon, chief executive of Ashford’s Future, the body charged with delivery of the Ashford housing growth area which is looking at imposing its own local tariff, says the ODPM’s delay in publishing the final version of the paper is frustrating. “We need to know what the rules are so that we can talk to landowners in a meaningful way about the tariff.”
Michael Gallimore, a planning partner at law firm Lovells, negotiated an early version of the tariff in London’s Docklands four years ago. He believes that the tariff will work best where an authority is dealing with a limited number of developers and owners, but less well in more fragmented circumstances.
Size also matters when it comes to how finely grained the tariff should be. Worries about “one size fits all” solutions apply equally to Barker’s supplement and local tariffs. Knowing what level to set is especially hard for an organisation like the Cambridgeshire Horizons delivery vehicle which spans five districts, acknowledges the organisation’s chief executive Stephen Catchpole.
The government thinks that getting the money is enough, but it’s just the start
Michael Gallimore, Lovells
Even applying the same level of tariff within a local authority area could prove too blunt an instrument. Stephen Joseph, London Thames Gateway Partnership deputy chief executive , says that to accommodate “quite specific circumstances” the tariff could be fixed at the level of the individual development brief. The only trouble with such an intricate approach is that it takes away much of the administrative simplicity that makes a flat-rate payment attractive in the first place.
The Home Builders Federation meanwhile is suspicious that councils will use the tariff as a starting point for negotiations. They are unlikely to be reassured by Milton Keynes council leader Wilson’s suggestion that negotiated agreements may still be needed to tackle site-specific issues, such as road access. John Walker, former chief executive of the defunct Commission for New Towns and adviser to the ODPM on land value capture, is keen to ensure this does not happen: “You could not have both running at the same time. It would be unreasonable as developers would see themselves being taxed twice.”
Even if the tariff pilot works in Milton Keynes, there is no guarantee it will succeed elsewhere. Lavish provision of council housing at the time of the new town’s foundation means Milton Keynes council only wants 5% of planned housing to be social rented. By contrast, Humber says Cambridgeshire Horizons has to deal with a much greater social housing under-provision.
Britain’s biggest new town has other advantages too, he points out: “Milton Keynes is fairly compact and has a hell of a lot of infrastructure in a relatively concentrated area, while the land to be developed in Cambridgeshire doesn’t, so it will be less efficient, and potentially more costly to provide the infrastructure.”
Lovells’ Gallimore, who is representing the Church Commissioners in their negotiations with Ashford over its mooted tariff, has concerns about how infrastructure will be delivered. “They [the government] think that getting the money is enough, but it’s just the start.”
Filling the gap
The Treasury is going to have a real shock about the costs required to deliver the communities plan
Martin Bacon, Ashford’s Future
And yet the biggest worry is money, particularly for those developers and landowners dishing out expensive working capital. “We have to make sure that if we [the developers] are tied into an agreement that we have funds to fill the gap,” says Gallimore.
Wilson estimates that Milton Keynes alone will need something like £2bn of infrastructure investment to support the growth plans. But the tariff will probably generate only 30-40% of the money needed. Wilson says she is in “no doubt” that Whitehall will have to fund most of the town’s infrastructure needs.
Over in Ashford, Bacon says the smallest of the growth areas will need £1bn of investment, half coming from as yet unidentified sources. He estimates that Ashford’s tariff should raise about £150m over the lifetime of the 25-year growth plan – helpful, but sufficient to plug just a small part of the gap. And if Ashford’s bid from the ODPM’s growth area gap funding pot is anything to go by, Bacon says it will be massively oversubscribed. “The Treasury is going to have a real shock about the costs that are going to be required to deliver the communities plan,” he says.
Walker agrees: “To be effective, what it requires is large-scale development complemented by a big commitment from government spending and that is as difficult as getting the money out of developers.”
Hewdon Consulting’s report for South East of England Regional Assembly (SEERA) says the government “should undertake to provide sustained high levels of public infrastructure funding”. The Government Office for the South East has signed a concordat with SEERA recognising that the South-east’s infrastructure needs require significantly greater investment. Mike Gwilliam, SEERA planning director, says that, like an alcoholic, the government has at last admitted that there is a problem. He accuses some authorities of crying wolf. “There’s a gap, but it can be much exaggerated. I’m less concerned about the growth areas which have access to funds; I’m more concerned about places like Hampshire, where that isn’t the case.”
But the three-year funding cycles that Whitehall operates under do not fit with the longer time frames strategic development demands. Wilson says: “Developers need assurance that they are not going to be left high and dry.” But any government can only make a commitment as long as it has an electoral mandate. Easy answers remain in short supply.
All routes: Barker’s national tax
Kate Barker’s report into housing supply for the ODPM and the Treasury, published last year, recommended what it described as a planning gain supplement, but which, to everybody else, looked like a repackaged development land tax.
“It has been tried three times and each time it has fallen flat on its face,” says Dominic Williams of transport infrastructure consultant Hewdon Consulting, which has just completed a report for the South East of England Regional Assembly on paying for infrastructure. The levy cost more to administer than it collected the last time it was introduced, Williams points out.
The sheer difficulty of working out what should be taxed and then adjusting it to take account of fluctuating market conditions makes Barker’s proposals unworkable in the eyes of many.
John Walker, former chief executive of the now defunct Commission for New Towns, who has been advising the ODPM on land value capture mechanisms, believes the centrally set supplement will be unattractive to communities.
“When you look at planning gain supplement, the one thing that it can do that Section 106 can’t is to redistribute between areas,” he says. “Section 106 appeals at a local level because people can see the money going on local infrastructure. The moment you see it going away, authorities know they are going to have to apply for it.” Even officials at the ODPM, which, with the Treasury, set up Barker’s review, are understood to be sceptical about the supplement.
To the south: Thames Gateway
The derelict brownfields of the Thames Gateway are the politically acceptable face of the government’s south-east growth plans. But everybody agrees that an area that has never been a first choice for home hunters will need vastly improved transport links to attract the scale of increased housing development outlined in the communities plan.
“In areas like the Thames Gateway, you have to make a significant investment in terms of public transport,” says Chris Brown, development manager of regeneration fund Igloo. And that’s to say nothing about the money that will have to be found for the public spaces needed to make the gateway a nice place to live. A report by the capital's development agency, published last year, estimated that providing the housing and the supporting infrastructure proposed in the London stretch of the gateway alone will cost £16m, half of which it expects to be provided by the private sector or through planning gain.
ODPM adviser John Walker believes that scope exists for the public sector to capture a share of any uplift in land value that occurs in the area. But Brown says the sums don’t add up. Any kind of local tax will deter developers from investing in brownfield sites where the costs of redevelopment outweigh the existing value. And the fact that most of the sites in question have an existing commercial or industrial use means the potential uplift is less than it would be on low-value agricultural land. As many are former industrial sites they would require clean up, which could be costly, and they are often in unattractive environments for would-be homebuyers. All these factors squeeze profit margins.
“In good housing markets, the developer would be keen to spend the money, but obviously in areas like the Thames Gateway you are looking for significantly more in terms of public infrastructure. The values are too low,” says Brown. Eric Sorenson, director of the Thames Gateway London Partnership of local authorities agrees. “We won’t get the market to respond until we get the upfront investment.”
To the north and midlands: housing market renewal pathfinders
The declining areas in the Midlands and the North that are earmarked for regeneration under the government’s housing market renewal programme also have pressing infrastructure needs. This is particularly the case in areas like East Lancashire, where the collapse of traditional industries means that improved communications are vital to the future of the housing market.
The whole premise of the market renewal programme, ODPM adviser John Walker points out, is that land and property values will rise. He thinks this uplift could be recycled into repaying the gap funding often needed to kickstart development.
Nigel Smith, Royal Institution of Chartered Surveyors regeneration panel chair, says that even in South Yorkshire, where he was, until recently, in charge of the local Doncaster 3D development company, greenfield land values would support a roof tax of the kind being mooted in Milton Keynes.
But Mike Gahagan, chair of the Transform South Yorkshire pathfinder, says that encouraging greenfield development in this way could undermine the market renewal initiative. “There are greenfield sites in places around South Yorkshire where you could get development. But if you do that, then what are you going to do to existing neighbourhoods that are struggling?”
Liverpool council has considered imposing a levy on land values to encourage the regeneration of the London Road area. But the authority gave up the idea once it realised that the sums raised would not justify the work it would need to administer it.
Toxteth councillor Richard Kemp believes that the potential uplift in values does not justify setting upan administratively complicated development levy in the pathfinder areas. He says that the Include partnership, an umbrella organisation of housing associations in Liverpool, has instead plumped for buying and then disposing of sites once they have been remediated, taking advantage of any intervening recovery in the market. He estimates that Include has raised £3-4m from the disposal and resale of sites that only cost £1m to acquire. But of course, this avenue will only be open to the pathfinders as long as land prices remain depressed, a situation that is already a distant memory in some areas of so-called housing market failure.
Source
RegenerateLive
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