Making development pay

London is growing and there is huge pressure to provide new sites and infrastructure for more housing and jobs. Although there is often a view that new development should generate new funding for infrastructure, in reality the picture is more complex.

Development in London often occurs on brownfield sites which are contaminated and need to go through a ‘clean-up’ process. New water, sewer and electricity services must be provided. All this is on top of the important transport links people need to reach their jobs and education, leisure and health facilities. The total development costs often exceed the anticipated uplift in land values.

There has been a perception that the traditional system of securing planning gain by means of S106 agreements has tended to penalise larger developments unfairly, while smaller developments often escape with minimal or no obligations. This has been a particular issue in locations where a number of smaller schemes do not individually generate additional requirements for new transport, social or utilities infrastructure, but their cumulative impacts result in significant requirements, which are difficult to capture in multiple S106 obligations.

To help tackle these funding gaps and provide a more even playing field, boroughs across London are implementing a new Community Infrastructure Levy (CIL) which captures some of the value generated by new developments. How can the planning and development system get developers and local authorities to work together to ensure things happen?

We asked two experts in the sector with different perspectives for their view:

Barry Smith - Head of City Policy and Strategy, Westminster City Council

“Given that the key test in setting a CIL is to strike an appropriate balance between the need to fund infrastructure and the potential implications for the viability of development across the area, we always knew that Westminster would be the London borough that would face the most robust questioning of its CIL rates and zones. And so it has come to pass! After two rounds of consultation, several meetings with our development community, a 94 page submission at the preliminary draft charging stage and over 130 development proxies on actual planning permissions since 2010, we will soon be submitting our draft charging schedule for public examination. It is testament to all those involved – particularly our consultants, our Cabinet Member and the Westminster Property Association - that we go into the examination with no significant objections. Subject to the outcome of the examination we hope to adopt our CIL early next year.

Thoughts are now turning to our ‘Regulation 123’ list (the infrastructure that is potentially CIL fundable), governance arrangements for collection, spend, monitoring and review and the future of Section 106 obligations and Section 278 agreements. We are currently out to consultation on the latter and we are also keen that the spirit of our innovative Public Realm Credits initiative is maintained in one form or another. To this end we are looking at how a CIL ‘payment in kind’ procedure might work alongside reimbursing third party funders. So, perhaps the really hard work starts now!”

Andy Hunt - Director, Quod Planning Consultancy

“Despite its high profile in the development world, CIL has not – yet – raised much money. It raised only £50 million in 2013/14 and 95% of that was by the Mayor of London for Crossrail. CIL collections will clearly grow from now on, but it remains to be seen whether it will match the Government’s anticipated £1 billion a year. As a result, CIL hasn’t yet delivered much infrastructure and the evidence presented at Examinations suggests that even if revenue matches expectations there will still be very large infrastructure funding shortfalls.

The key issue for large-scale infrastructure will be how Section 106 money is used, especially since the restrictions on pooling came into force in April. Most London authorities have their CIL in place so are less restricted, but for the authorities without CIL in place – or where viability is a challenge – there will be difficulties in raising money for large-scale projects. The Regulations need to be clearer on how much pooling can be done for individual items or types of infrastructure. There also needs to be more certainty that authorities will spend the money to deliver the infrastructure that is necessary for developments to come forward.”

These views show that at the heart of the debate is the age-old conundrum of how much new development can realistically afford to pay for new infrastructure, while remaining a viable proposition in its own right. The new tariff-based approach has the advantages of defining the amount of CIL payment and reducing/avoiding the need for complex and potentially time-consuming S106 negotiations. It may therefore be possible for development to start sooner after the submission of the planning application.

However some people in the sector consider that there are potential downsides. There is little if any discretion for negotiation on the amount payable and on the triggers for when the instalments are paid. The payments are typically earlier in the development cycle than the equivalent S106 obligations, thereby affecting the development cash flow. For residential developments, the proportion of affordable housing can be varied to maintain project viability, but this could be suboptimal where the primary aim of the project is housing renewal. For marginal commercial schemes, the comparative rigidity of CIL could determine whether or not the project is built.

Developers are also naturally concerned that planning gain should be directed towards infrastructure improvements in the immediate vicinity of the scheme. There is much more flexibility over where the CIL payment can be applied, even where authorities seek to ring fence a proportion to be spent on local projects. The counterargument is that CIL gives planning authorities greater certainty over the delivery of key projects which are to the overall benefit of the area.

These views show the ongoing challenges of using developments to fund infrastructure. The next few months will provide an interesting insight into the impact of the new levy.