Technical Consultation on the Infrastructure Levy: Our Response.
When the Infrastructure Levy Consultation launched, back in March, I said that it was complicated.
Now, after spending much of the last eleven weeks grappling with the detail of the consultation, I think 'complicated' may have been an understatement...
The proposals that are being consulted upon are both a radical reform to our developer contributions system and an extremely risky one.
Today, we submitted Irwin Mitchell's formal response to the consultation. It doesn't close until 9 June 2023.
If you are contemplating responding, but are not quite sure where to start, then a full copy of our response can be downloaded from the link at the bottom of this post.
If you are on the fence about why this consultation is worth engaging with, it might be worth reviewing our opening remarks, which I have been set out in full below.
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Preliminary observations
The consultation states that the aim of the proposed Infrastructure Levy is to be more efficient, more transparent, more consistent, and faster than the current system for securing developer contributions. There is nothing in the design of the Levy, however, that suggests that these aims will be met.
Speed & efficiency
It is highly unlikely that the new system will operate more quickly or more efficiently than the current one. The proposed Infrastructure Levy will still require negotiated s.106 Agreements on the vast majority of large development sites, to deal with site specific issues, such as on-site affordable housing, first homes and biodiversity net gain.
Most of the delays associated with s.106 Agreements at present do not arise from the negotiations themselves, but rather from a lack of the qualified solicitors and planning officers required to progress them within local planning authorities. The introduction of the proposed Infrastructure Levy will do nothing to change this. Indeed, it is likely to add new sources of delay into the system, as neither the private nor the public sector are geared up for the sheer number of additional valuations that the Infrastructure Levy will require.
If local planning authorities were better resourced, then we could significantly reduce the level of delay within the current system, without the need for such wide-ranging and disruptive reforms.
The Infrastructure Levy is also unlikely to raise more funds than the current system.
There is only so much value that can be extracted from a development site before it becomes unviable. Research undertaken by Savills estimates that the current system typically captures about 50% of the land value uplift in a development site by way of developer contributions – after the costs of enabling works and site remediation have been factored in. The resulting return to the landowner, and indeed the developer, are then subject to tax.
Given that the aim of the Infrastructure Levy is to secure at least as much affordable housing as the current system, whilst simultaneously ensuring that developments are not rendered unviable across the board, there is a realistic prospect that it may not, in fact, secure any additional funds over and above those that are already being received.
This risk is also highlighted by the “Exploring the potential effects of the proposed Infrastructure Levy” Report (Feb 2023) that was published alongside this consultation (the Liverpool Report), which states “there is potential to raise more but whether this can be realised compared with the existing S106 and CIL system depends not just on rates and thresholds chosen but on the extent of exemptions, how market participants react especially landowners, land promoters and developers, and the extent to which local authority borrowing costs in advance of receiving levy income reduces what is available to spend”.
Consistency & transparency
It also does not appear likely that the Infrastructure Levy will improve consistency or transparency within the system. There will still be significant variations between local planning authorities, in terms of rate setting and collection. Whilst the role of infrastructure delivery statements will not improve the overall transparency of what is being collected or spent by local planning authorities in their communities.
Undermining the aims of the Levelling Up Agenda & wider planning reforms
We are also extremely concerned that the roll out of the Infrastructure Levy will simply further worsen or embed the regional inequalities that are already present within the system. The Liverpool Report makes this point extremely clearly when it states, in paragraph 5.32 that “a locally raised and spent IL will result in the highest value sites returning the greatest value of developer contributions. It is, therefore, likely that a shift to the IL would reinforce the geographic inequalities already evident in the current system”. Such an approach fundamentally undermines the government’s Levelling Up agenda, which is designed to reduce these types of regional inequalities, as opposed to reinforcing them.
The proposal also undermines a number of other key components of the government’s wider planning reform agenda. Most notably, the adoption of the new Infrastructure Levy is unlikely to be compatible with the government’s aspiration for a 30-month local plan adoption process.
For the reasons set out below, it is vital that any new Infrastructure Levy charging schedule, and the infrastructure delivery strategy, are both prepared and examined alongside council’s local plan. The evidence gathering required by a local planning authority to support the adoption of the Infrastructure Levy and the sheer complexity of the decisions that need to be taken around rate-setting and viability testing means that this process is unlikely to be quick and will add significant additional complexity to the local plan process. It is also likely to be extremely contentious, as this is the only point at which the viability impacts of the proposed rates can be tested and assessed. As a result, the examination of proposed charging rates is likely to become very time intensive for both developers and local planning authorities alike.
We should also highlight that introducing the levy will disproportionately impact specialist or innovative forms of development, such as highly sustainable dwellings, student accommodation, co-living and specialist housing for the elderly, at a time when the government is actively seeking to encourage the expansion of these sectors.
Last year, the government recognised the critical need for the provision of specialist housing for the elderly, by endorsing the Mayhew Report – which calls for the delivery of 50,000 new units a year – and setting up the Housing with Care Taskforce, which met for the first time a few weeks ago. However, there is a lack of recognition at all levels of government – including at local authority level – that the operational models and viability profiles for these types of development are very different to those from general market housing. As a result, they have tended to be overlooked when local planning authorities are formulating their local plans or setting there CIL charging rates. Where viability assessments are carried out, the assumptions on which they are based (around sales rates, levels of non-saleable floorspace or operational costs) tend to be wholly inadequate – leading to CIL charging rates that are difficult for the sector to absorb.
There is a real risk that this error will be repeated under the new system, resulting in Infrastructure Levy Rates being set at a level which prevents any expansion of the sector that the government seeks to achieve. It is notable in this respect that the Liverpool Report did not assess the impact of the Infrastructure Levy on a single specialist housing scheme for the elderly when carrying out the financial modelling on which this consultation has been based.
Impact on wider land transactions
We are also concerned that the government has failed to take into account the impacts of a transition of this type on the wider land market – and in particular on-site assembly, land promotion and strategic land. Assembling a development site and promoting it through the local plan process is a lengthy and resource intensive exercise. Option and promotion agreements are negotiated with landowners at the very beginning of the process and frequently extend over a ten to fifteen-year period. These agreements also tend to include estimates or caps on both promotion costs and expected developer contributions and regularly include fixed minimum land values. Agreements also frequently include tax freezer provisions whereby landowners are able to delay the sale of their land if the tax levels become excessive.
Shifting to a process which is predicated on taking a percentage share of the gross development value will fundamentally undermine the promotion and delivery of sites that are subject to an ongoing option or promotion agreement, as it is highly likely that the minimum land values required to incentivise the release of these sites will exceed the existing use value allowance that is contained within the minimum threshold.
Also, as is made clear in the Liverpool Report, moving away from easily predictable returns (which a minimum land value provides) is likely to deter landowners from releasing their land for these types of longer-term strategic developments in the first place.
Conclusion
Whilst we understand the government’s frustrations with the current system of securing developer contributions, it does in fact function relatively well. Many of the complaints cited in this consultation, such as delay and a lack of transparency, could be more effectively resolved by:
a) better resourcing local planning authorities – both at officer level and within their legal teams – to allow applications to be dealt with, and s.106 agreements negotiated, more rapidly; and
b) adjusting or revising the reporting and spending mechanisms that are already in place. Much could be achieved by simply enforcing the requirement that all councils produce infrastructure funding statements; and by standardising the allocation mechanisms within CIL charging authorities – so that it is easier for County Councils to access funding.
We would urge the government to simply retain, and amend, the current system as opposed to launching on a highly disruptive and uncertain set of reforms which are unlikely to achieve your stated objectives.
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