Infrastructure Levy under the spotlight: nobody expects the Planning Inquisition
There has been a lot of discussion about the new ‘Infrastructure Levy’ since the Levelling Up & Regeneration Bill was published. In this post, CBRE's Matt Spilsbury and I* take a look at the proposals in the Bill and the questions that need to be answered before this new way of raising funds for infrastructure makes its way onto the statute books…. It is fair to say that there are a lot of them…
“We interrupt this program to annoy you and make things generally more irritating.”
Before we get into the questions, a quick reminder of what is actually being proposed:
The new Infrastructure Levy is a charge on development within a local authority area. The new levy must be spent on the provision, improvement, replacement, operation or maintenance of infrastructure, or (notably) for any other purpose specified in the regulations. Most of the details surrounding the operation of the new levy will be set out in secondary legislation (the upcoming ‘regulations’). The ‘enabling’ legislation within the bill is remarkably similar to the provisions in the Planning Act 2008 that were used to introduce CIL. There are, however, some key differences in how the new levy seems to be intended to operate.
- Firstly, this iteration of the levy will be mandatory. Local authorities in England will not be able to opt out, as they can with CIL.
- Secondly, the new levy will be charged as a proportion of the final gross development value (‘GDV’) of development, which may include works and changes of use (and may not necessarily require additional floorspace to trigger liability); and
- Thirdly, this version of the levy is intended also intended to raise funds for affordable housing, which is currently excluded from the scope of CIL, meaning housing will become ‘infrastructure’.
The general tone of government communications around the levy makes it clear that this version of the levy is intended to raise more money than the planning obligations that it is intended to replace.
Now that the introductions are out of the way, let’s turn the spotlight on the details. We have structured this article as a series of questions. This is in part because we don’t really have a great deal on information about how the proposed levy is intended to work**; but also because I have been watching too much Monty Python and nobody expects the Planning Inquisition.
Why are there so many superficial similarities with CIL?
“Judean People’s Front? We’re the People’s Front of Judea!”
When reviewing the draft legislation in schedule 11 of the bill, the first thing that struck me was an overwhelming sense of déjà vu. The enabling legislation for the infrastructure levy is remarkably similar to the provisions in the Planning Act 2008 that were used to introduce CIL. Not only is the legislative framework similar, but so is the name… replacing CIL with IL almost seems designed to downplay the potentially radical differences between the two levies in an attempt to generate an apathetic shrug of the shoulders from the industry.
That is not an overstatement, as when you dig into the detail of how the new levy is intended to operate; the differences between the two levies are stark indeed. Unlike CIL, the new levy will be charged as a percentage of the GDV of the project, a concept which is inherently variable and uncertain. It is also mandatory – local authorities will have no choice but to adopt it - and not necessarily limited to solely funding new capital infrastructure (or infrastructure at all).
There is also very little in the act to give any indication of whether any exemptions and reliefs will be made available. Under the CIL regime these reliefs have, over time, evolved to become essential to the functionality of the system and their absence could prove to be highly problematic.
Can the Infrastructure Levy really ‘replace’ s.106 Agreements?
“It's passed on! This s.106 Agreement is no more! It has ceased to be! It's expired and gone to meet it's maker! This is a late s.106 Agreement!”
Initially, at least, it seems as if the answer to this question is a resounding ‘No’. The policy notes that accompany the bill confirmed that:
- s.106 Agreements will be retained for large strategic sites, which will be exempt from the new levy entirely; and
- that narrowly targeted s.106 agreements securing on site infrastructure will be retained alongside the levy on other sites.
However the bill itself grants the Secretary of State the power to change the scope of s.106 agreements, s.278 agreements, and a number of other infrastructure agreements, through secondary legislation, so whether these agreements will remain in the longer term has yet to be ascertained. It would be a strange move for the government to abolish s.106 Agreements in their entirety, however, as they are currently the preferred mechanism for securing on site biodiversity enhancements and other recent government policy priorities (e.g. First Homes)
Can the Infrastructure Levy really raise more funds and deliver more infrastructure than the existing system?
“Finally, monsieur – a wafer-thin mint”
This is a two part question. It is perfectly possible that the newly designed levy could raise more funds than its predecessors – although this may result in more marginal schemes simply not coming forward for development. However, that does not mean that any more infrastructure will actually be delivered on the ground or any more swiftly and efficiently.
Much like the current iteration of CIL, there is nothing in the proposed legislation that would actually require the funds raised to be spent on the delivery of infrastructure in a specific timeframe. In some parts of the country, very large war chests of CIL funding have been built up, which have yet to result in a single infrastructure project on the Council’s Infrastructure List (now contained within their Infrastructure Funding Statements) actually being delivered. This is, we understand, in part because of protracted procurement processes and a reluctance on behalf of statutory undertakers and infrastructure providers to actually commit to delivering them.
There are also concerns that including affordable housing within the scope of the new levy will reduce the level of funding available for other projects, such as education or transport schemes.
It could, however, go the other way. For example, how far up a Council’s list of priorities will delivering affordable housing be if economic times are tough and it is a fiscal decision between delivering new school places, meeting frontline service funding requirements, repairing or replacing critical existing highways infrastructure, or building new affordable homes?
How will the Infrastructure Levy Proposals be affected by the extended Right to Buy?
"House? You were lucky to have a house! We used to live in one room, all hundred and twenty-six of us, no furniture"
The irony was not lost that the day following the bill’s second reading, at which Michael Gove insisted the new levy would ensure developers would be held to account to deliver affordable housing and other infrastructure, Boris Johnson announced the government’s expanded right-to-buy scheme. This will allow housing association tenants to purchase their affordable homes. Aside from the wide range of practical issues, the historic failure to replace sold stock does not bode well for the certainty of growing the future supply of affordable housing – particularly in the absence of funding to meet the compensatory shortfall for stock reprovision by housing associations. An inherent contradiction may be emerging… push more stock into the system, only to sell if off.
One thing is for certain, however, in its current form the new levy will completely sever the link between the development that is coming forward and infrastructure that is being funded by it.
The new levy will be estimated at the outset, but expected to be primarily paid at project close once the final GDV has been crystalised. Reference is made to payments ‘on account’, but this will necessitate balancing at project close and, which developers will want to pay early or take on the commercial risk that an overpayment is made, with the inevitable cashflow disbenefits this brings. In simple terms, if infrastructure is required, it will be paid for by an earlier development – someone else’s development.
This is not necessarily a good thing. As there can be no guarantee that the infrastructure funding delivered by a new development will be spent in the vicinity of the development itself, meaning it could make it harder to generate local support for planning applications.
Is it realistic to expect Councils to forward fund infrastructure projects through borrowing?
"Always look on the bright side of life"
The proposal that this will be mitigated by Councils borrowing to against future receipts to forward fund the delivery of infrastructure – so that it comes forward ahead of the development that has been consented – raises more questions than it answers. As it fails to consider what will happen if the consented development does not come forward for any reason or delivery is delayed (for example in the instance of a recession). How is the Council then supposed to service the debt and recoup the funds required?
It is fair to say that this question is one that has not gone unnoticed and was subject to cross-party scrutiny in the bill’s second reading in the Commons***. Lisa Nandy summarised it eloquently by stating:
“The Secretary of State proposes an infrastructure levy to replace section 106. I apologise if I have missed it, but there is no clarity in the Bill about whether that will raise more or less money than the current system. There is no clarity about whether it will boost affordable housing or whether affordable housing will continue to drop off a cliff. I will tell him why that matters: it potentially makes the difference to whether our kids can stay and raise families in the communities they were born into. We are entitled to know the answer, not after some horse-trading behind closed doors or on the back of an envelope once he has asked for our votes, but now, as we scrutinise the Bill.”
This is the dilemma. The Commons and the Lords are being asked to pass into law a mechanism for which they have very little information to base decision making upon. Cue, again, Lisa Nandy:
“Where are the Bill’s impact assessments? Where is the regional impact assessment? Where is the local impact assessment? The Secretary of State knows how important it is to close the gaps between and within regions: it is so important to him that he proposes to write such objectives into law, with some caveats. The clue is in the name: it is the Department for Levelling Up, but it has not even bothered to assess the impact of its own legislation on regions of this country beyond London and the south-east. I would be pretty ashamed of that.”
Whilst DLUHC promises a technical consultation ‘soon’, which must shed more light on the practical details of the new levy, one must ask why government hasn’t dodged this rather obvious bullet by front-running the bill with an options appraisal and impact assessment to demonstrate the new levy genuinely will outperform the existing system of developer contributions. After all, they’ve had almost two years to knock something together since Infrastructure Levy was announced to much fanfare back in the (now deceased) Planning White Paper of August 2020 vintage.
In the absence of clarity from government (yet), how could the IL function at a practical level?
"Then lobbest thou thy Holy Hand Grenade of Antioch towards thy foe"
Well, what we certainly don’t have sight of yet is the promised simpler, more transparent system. That’s not to say it can’t be, but it is hard to see what the bill proposes ending up this way, even if you squint.
It is expected that the debate over the new levy rates and the implications for financial viability will be focused solely at the examination in public for the new levy charging schedule.
Stakes will be high. By wrapping all infrastructure and affordable housing contributions into the new levy, the rates will be very substantially more than under the current CIL regime. Moreover, the levy is expected to perform as a type of open-ended value-based overage mechanism predicated on the transactional value(s) generated.
It is expected that PINS will manage the examination. However, perhaps given the stakes, the examinations could be jointly overseen via a suitably qualified RICS practitioner recommended by the organisation?
There seems to remain some confusion as to how the new levy will function. Michael Gove suggested, in the bill’s second reading that the levy would capture a fixed percentage of land value uplift:
“The reason for the infrastructure levy is that it ensures a local authority can set, as a fixed percentage of the land value uplift, a sum that it can use—we will consult on exactly what provisions there should be alongside that sum—to ensure that a fixed proportion of affordable housing can be created.”
Yet, this isn’t quite correct. The bill suggests that the levy will capture a percentage of development GDV. If it was a percentage of land value uplift, it would be able to account for site-specific construction costs or inflationary pressures, as under the current system. These factors, which go to the heart of calculating residual land value (and uplift) appear to be cast aside under the new levy.
What now for scheme-specific viability assessments?
"with nasty big pointy teeth"
So will this focus do away with scheme-specific viability assessments? Well, probably not entirely. It is expected they will still be needed in respect of addressing complex and large strategic site allocations and options appraisal or enabling development assessments for heritage assets.
Moreover, the new levy appears to introduce the scope for new forms of dispute – related to the valuation of a scheme’s GDV, meaning surveyors will remain involved in the planning process irrespective of government’s attempts to remove them altogether.
So are there alternatives that would achieve the same government objectives without the need for new legislation? Well yes. The most straightforward evolution of the current system would be to require all qualifying sites to incur a late-stage viability review, which would be controlled via S106 Agreement. Such reviews are typical under the current regime, for large, multi-phase sites and schemes taking the ‘viability tested’ route under the GLA’s London Plan. There is, however, no reason why the net could not be cast further afield.
The late-stage (end of scheme review) could be based on achieved transaction prices, with the developer’s profit, over a defined threshold, split between the LPA and the developer. This would be more equitable, given that the actual profit achieved is being taxed, rather than simply the sales value (with the former accounting for issues such as benchmark land value, construction cost inflation or unforeseen abnormal works, and the latter ignoring the impact of such factors on actual outturn scheme performance).
However, as simple as the above would be to achieve – via amendments to PPG, the NPPF and the issuing of model S106 review mechanism templates for use, it remains unappealingly granular and site-specific to government. Moreover, it would keep viability – and the role of surveyors – engaged in every scheme, which government appears dead-set against. Instead, the government appears unswerving in the desire to use CIL as the template to evolve into the new levy.
Will the new levy deliver on levelling up and regeneration?
"There are a great many people in the country today, who through no fault of their own, are sane"
Well, as alluded to earlier, no one really knows – not even the government. Well, if they do, they’re not telling.
What is clear, however, is that the new levy will not be a silver bullet that generates vast additional sums overnight for immediate investment in regenerating and levelling up those parts of the country needing it most.
The bill proposes a gradual roll-out on a ‘test and learn’ basis. This means pilots. It also means the Government is concerned that, like CIL, the new levy will need some serious ironing-out. Full national coverage is likely to take several years – assuming that it is pursued. This is sensible as the shift to the new levy is likely to be complex and costly to administer, which means it is important that Local Authorities are not required to invest limited financial and officer resources into the process prior to it being optimised.
Once the new levy is adopted, there is no longer a scheme-specific viability ‘release value’. The non-negotiable GDV threshold structure could be a relatively blunt instrument.
There is a high risk that the GDV-based levy will perversely incentivise developers to strive harder to drive down costs and maximise returns in recognition that site-specific costs will no longer be negotiable on viability grounds and reflecting that a fixed percentage of the development GDV will be given over to the charging authority – irrespective of actual profit outturn or hurdle.
Spatially, this could lead to a risk-off scenario with investors, funders and developers discouraged from delivery on more complex, higher risk, higher density, brownfield sites in urban areas, and lower value locations.
Instead, it will incentivise developers to focus competition for land and delivery in higher value locations across the South of England by seeking lower risk greenfield, edge-of-settlement, and low density urban sites where abnormal cost risks are negligible and the upside potential for GDV growth in the face of constrained land supply is greatest.This will clearly conflict with the Government’s brownfield first policy objectives and could be a highly damaging unintended consequence.
So, how will the new levy help to fund infrastructure in lower value markets, or in urban locations with high existing use values (i.e. where there is competition for land supply between existing commercial uses and alternatives, such as residential), and where the ‘premium’ is limited?
Well presumably local authorities in such locations there will be a reduced sum available from charging the levy. Will this lead to certain authorities continuing to struggle to fund infrastructure? Unless there is a redistributive mechanism, it is hard to see how this is avoidable.
That is the crux. A new levy won’t solve the problem of funding major infrastructure, but if done right it may just prove to be one contributing source. Government needs to do much more to bridge the infrastructure funding deficit. Land value capture alone will not be the answer.
How are the various land value capture mechanisms in the bill (and outside it) intended to work together?
“My brain hurts!”
The new Infrastructure Levy is only one of a number of land value capture mechanisms that the government is currently mulling over. The bill also proposes the adoption of ‘community land auctions’ and a consultation on changes to the CPO regime is also currently ongoing. There is very little detail available at present on how any of these mechanisms will work individually, and absolutely no information about their cumulative effect. This is a problem, as the unintended consequences have yet to be fathomed and unpacked in any meaningful way.
We can only hope that parliament uses the committee stages of LURB to do precisely that.
Some things in life are bad
They can really make you mad
Other things just make you swear and curse
When you're chewing on life's gristle
Don't grumble, give a whistle
And this'll help things turn out for the best
And
Always look on the bright side of life
Always look on the light side of life
**just to say, views are our own etc.
**a fact that back bench MPs made a great deal of noise about during the bill’s second reading in the House of Commons
***for a full transcript of the second reading, see here.
The Secretary of State proposes an infrastructure levy to replace section 106. I apologise if I have missed it, but there is no clarity in the Bill about whether that will raise more or less money than the current system. There is no clarity about whether it will boost affordable housing or whether affordable housing will continue to drop off a cliff. I will tell him why that matters: it potentially makes the difference to whether our kids can stay and raise families in the communities they were born into. We are entitled to know the answer, not after some horse-trading behind closed doors or on the back of an envelope once he has asked for our votes, but now, as we scrutinise the Bill.”
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