The Infrastructure Levy
The Levelling Up and Regeneration Bill is back on the political agenda after several months of uncertainty.
One of its key policies is for an Infrastructure Levy: according to the notes accompanying the Bill, ‘a simple, non-negotiable, locally-set Infrastructure Levy will ensure that developers pay their fair share to deliver the infrastructure that communities need’.
The Levy would be calculated on a final gross development value of a scheme or phase of a scheme, above a minimum levy threshold. It is intended to replace CIL, Section 106 and affordable housing developer contributions with a single flat-rate levy based on the final sale values of a developments. Although primarily a financial contribution, the Levy could require the contribution of on-site infrastructure within a the development.
So as it stands, a levy (CIL), in-kind developer contributions (S106) and affordable housing would be replaced with a higher levy and in-kind developer contributions (which may or may not include affordable housing).
I welcome a change to what is a broken system. CIL has been an unmitigated disaster: it was supposed to make things simpler but delivered the opposite. Similarly S106, because of its very opaque nature, was always problematic.
But the Infrastructure Levy does not mark the end of S106: the notes state that ‘S106 agreements will be retained to support delivery of the largest sites. In these instances, infrastructure will be able to be provided in-kind and negotiated, but with the guarantee that the value of what is agreed will be no less than will be paid through the Levy.’
Unfortunately the Infrastructure Levy doesn’t achieve the much needed fix.
Private developers and housebuilders are not best placed to deliver affordable housing and most recognise this, either selling off plots allocated for affordable housing or working with an RSL as a delivery partner.
Furthermore, in the years that pass between a planning committee resolving to grant planning permission and a council signing the S106 agreement, market or legislative conditions have often moved on. This can have significant impacts on the financial viability of a development, which in practice often results in a scheme only becoming viable through a reduction in affordable housing.
And the replacement of CIL is long over-due. In its original form, CIL was intended as a straightforward and simple levy which allowed developers to budget for infrastructure payments at an early stage in the development process. However, when used in parallel with S106 agreements, CIL became overly complex. It does not yield the necessary funds to pay for the infrastructure needs and does not work well for larger strategic sites, particularly around ensuring that onsite infrastructure provided by the LPA is delivered in step with the development.
The agreement of a set levy would reduce these last-minute, multi-party negotiations on both infrastructure and affordable housing, resulting in more certainty for local authorities.
In a climate of rising land values, greater land value uplift could be captured for local authorities. Developers would have the benefit of ‘patient capital’ as a result of the payment being made on completion of the scheme. For local authorities, the delay in the payment being received would, according to recent news reports, be circumvented by new rules allowing them to borrow against future infrastructure levy revenues. This would provide the substantial advantage of enabling the development of infrastructure for major new settlements at an early stage. The question here is whether all local authorities will have the appetite to borrow against this fund, particularly as authorities can currently borrow against CIL funding, but some choose not to.
The challenge, at least for some local authorities, will lie in their ability to deliver affordable housing and other elements of infrastructure. The proportion of homes provided by councils has dropped, from 46% in 1977 to 2% in 2019. Local authorities have experienced years of under-funding which has resulted in the considerable reduction of their technical planning and architecture teams. Land ownership will be an issue for many: where appropriately located municipal land is in short supply, it will be necessary for councils to bid against private sector housebuilders.
Additionally if this new approach to social housing leads to the creation of new council housing estates, the aspiration of ‘pepper-potting’ privately owned and affordable housing will end, ultimately resulting in a return to the council housing ‘ghettos’ of the 1970s.
And there are many other issues. The introduction of any new tax would require cross-party support to avoid landowners simply waiting for a change of Government before bringing forward land for development (in the belief that a different government might repeal any new legislation allowing a greater future land price to be secured); the level of taxation must be set at such a rate with raises necessary funds without stymying the speculative land market; and local authorities will require the necessary skills to oversee the administration of the new levy. Furthermore, the financial benefit of any change may take some time to filter though, as much land around existing settlements is already tied up under option agreements.
It is yet to be confirmed whether the Infrastructure Levy would be imposed at a standard rate. This seems unlikely because of the considerable variety of land values across the country, but the determination of the levy at a regional or local level would be a considerable burden and could result in an inconsistent delivery of new homes across the country – and one which runs counter to the levelling up agenda itself.
The major benefit of such a change is to untangle developers from the lengthy negotiations currently faced and deliver more certainty to local authorities – but there is a lot of detail to work through before this can be achieved.