Section 1 of this extended post describes how S106 accidently evolved into the primary source of affordable housing, as Table 1 shows, then reports its identified shortcomings, before pointing out that progressive improvements in S106 practice, attributable to the use of standard templates, learning by doing and from experience, and greater consistency and certainty in national and LPA policy and practice, has weakened the force of some of these criticisms, while alternative mechanisms proposed across successive consultation cycles suffer from their own problems.
Section 2 describes the design and policy history of one such mechanism, the Planning Gain Supplement (PGS) proposed in the 2004 Barker Report and why it was stillborn.
Section 3 described the design and operation of the Community Infrastructure Levy (CIL) and how it was undermined by political mismanagement and neglect related to a lack of overarching commitment to first order objectives, including increasing infrastructural investment closer to needed economic and social levels, and by
design problems, identified in Table 2, that not only afflicted CIL but are inherent to any land value capture mechanism that aims to combine the advantages of national policy certainty with needed local flexibility in implementation.
Section 4 describes the proposed new Infrastructure Levy (IL), its possible advantages which, however, depend upon assumptions that tend to conflict with reality on the ground while it could introduce further complexities and problems, and/or replicate the problems encountered by CIL, before noting that the absence overarching political commitment to increased levels of local infrastructural and affordable housing will render any mechanism ineffective.
Section 5 concludes that the upheaval, confusion, and policy blight that would follow the introduction of replacement IL proceeding fitfully in parallel with the existing CIL and S106 systems withering on the vine for a decade or more, is likely to result in more harm than good. The lesson of the CIL implementation process was clear enough and should be learnt this time round.
It follows that incremental reform to, rather than a complex replacement of, the existing ‘present imperfect’ CIL and S106 systems, focused on the issues identified in Table 2, seems to offer a more sensible way forward.
Such changes should include setting clear process arrangements for the forward financing public funding of infrastructure to help to ‘crowd-in’ future development, the definition and application of development viability with reference to land value mechanisms (whether IL, CIL or S106) that can best reconcile national certainty with needed local variation, securing greater consistency of, and certainty in the application of S106 affordable housing contributions at both central and local levels in a way that could tap effectively into the potential for increased land value, where that was present.
1 Section 106 obligations: an accidental provider of affordable housing
Section 106 planning obligations (S106) are legally enforceable contracts between local planning authorities (LPAs) and developers. They specify the contributions required to make specific developments acceptable in planning terms.
These contributions can be made in cash or kind and can include specific items of infrastructure, such as access roads, new junctions, or, in the case of the largest developments, even new health and school facilities where these are required by the new development in question, as well as more generally affordable housing.
Developer affordable housing contributions involve the provision of a designated proportion of dwellings on affordable terms to a social landlord, including direct on- or off-site provision of rented and discounted low-cost home ownership units, on- or off-site provision of land for free or at a rate below market value, or by making commuted monetary payments or other contributions.
S106 contributions take their title from Section 106 (inserted in by Planning and Compensation Act 1991) of the the Town and Country Planning Act 1990 (TCPA1990).
It provided LPAs with the specific statutory power to, and consolidated the process by which they could require obligatory contributions (commitments) to make schemes or projects acceptable in local planning terms.
Planning obligations (Section 106 or S106) could now be attached to a planning permission or derive from a unilateral undertaking – usually made by developers at planning appeals.
Section 52 of the Town and County Planning Act 1971 had earlier specifically empowered local planning authorities (LPAs) to make a planning permission(s) conditional on an applicant(s) entering into a legally binding planning agreement(s).
Despite the enactment of TCPA1990, planning agreements and conditions sometimes continued to be used in an ad hoc, and, at worst, arbitrary way, raising concerns about a form of ‘legalised bribery’ taking place.
Permissions, for instance, for out-of-town shopping centres, could be, in effect, auctioned to the developer offering the best ‘deal’ to fund infrastructure and facilities that were neither necessarily materially related to the development in scale or kind, nor integrated or consistent with the relevant Local Plan (LP) – see, for example, May 1995 House of Lords case.
Government circulars, departmentally issued to provide non-statutory policy guidance on the local implementation of legislative measures and which can provide material considerations to LPAs to consider when making planning decisions and to the Planning Inspectorate or to the courts when reviewing such decisions, often covered such concerns.
Circular 16/91, circulated in the wake of TCPA 1990, confirmed the government’s policy position that obligations should only be sought or made when a direct relationship between such obligations and the proposed development was established, and when these obligations fairly and reasonably related in scale and kind to the same development – a position sometimes termed, rational nexus, that has since hardly changed.
It also highlighted that the term ‘planning gain’ – capturing for public gain a share of the uplift in development value attributable to a planning permission(s) – neither possessed statutory significance nor backing within the planning legislative framework, specifically cautioning LPAs not to seek cash or in-kind payments for purposes not directly related to proposed developments.
However, Circular 7/91: Planning and Affordable Housing, began to plough a parallel furrow, by extending the policy scope for LPAs to use S106 as a significant source of local affordable housing supply.
It confirmed that a “community’s need for affordable housing is a material planning consideration that may properly be taken into account in formulating local plan policies”, and “they (such policies) can properly be used to restrict the occupation of property for people falling within particular categories of need”, although it went on to add the rider that “planning conditions and agreements cannot normally be used to impose restrictions on tenure, price or ownership”.
Paragraph 12 of Circular 11/95 then made it clear that where it was possible to for a LPA to use either a planning condition or an obligation(s) then it should use the former, as the latter precluded the developer appealing against its imposition.
Notwithstanding its official discouragement of using planning obligations, the same circular also indicated that planning instruments could be used, in effect, as tool of housing policy, although some ambiguity remained (the circular was issued to reflect case law precedent, rather than to declare a new policy direction backed by government commitment: see last sentence below), with its para 97 advising that:
“The courts have held that the community’s need for a mix of housing types – including affordable housing is capable of being a material planning consideration. It follows that there may be circumstances in which it will be acceptable to use conditions to ensure that some of the housing built is occupied only by people falling within particular categories of need. Such conditions would normally only be necessary where a different planning decision might have been taken if the proposed development did not provide for affordable housing and should make clear the nature of the restriction by referring to criteria set out in the relevant local plan policy. Conditions should not normally be used to control matters such as tenure, price, or ownership”.
Margaret Thatcher’s Conservative governments during the eighties curtailed council house building programmes while post-1980 Housing Act Right-to-Buy programmes dwindled their existing stocks.
Housing associations (now Registered Providers, RPs) became the primary source of new social housing let at sub-market rents during the eighties, but at much-reduced volume levels.
Their main funding source was capital housing grant – then called Housing Association Grant (HAG), now known as Social Housing Grant (SHG) – channeled through a public agency founded in 1974: the Housing Corporation (now Homes England).
Although post-Thatcherite governments continued to direct public spending away to other social spending programmes, they did, however, recognise the need for additional affordable housing supply to increase.
In that political light, from the end of the eighties onwards, RPs were given greater freedoms to borrow privately to supplement public grant support, allowing them to ‘stretch’ supply levels, even as the percentage of scheme costs met by grant progressively reduced.
The planning system also came into steadily larger view as an alternative potential mechanism to expand affordable housing supply.
Circular 13/96 acknowledged that a practical way of ensuring long-term control over ownership and occupation was to involve registered housing associations in the provision of the new affordable housing using planning (affordable housing) obligations.
Circular 6/98 reduced the threshold below which it would be inappropriate seek affordable housing obligations to 25 dwellings, save that for Inner London or across other areas “where a robust housing needs assessment provided evidential support for a lower threshold”, a lower 15 dwelling threshold was set. It is now ten dwellings.
Not only was the base on which S106 affordable housing obligations could be levied broadened, but the proportion of social housing completions that used a mix of public and section 106 support (partial grant) rose, as the proportion funded solely from public grant fell.
The shift to the use of S106 as a supplemental and then as an alternative funding source to public grant accelerated as the new millennium progressed.
Evidence submitted to House of Commons in 2011-12 indicated that the number of new affordable homes approved through S106 obligations more than trebled from just under 14,000 in 1998–99 to peak at over 48,000 in 2007–08. An estimated 80% of these approvals were subsequently actually delivered.
As Table 1 reports (itself collated from Table 1000C of the official affordable housing statistical series) the proportion of social rented completions accounted for by nil grant S106 also steadily increased from three per cent in 2002-3 to reach 11% by 2008-2009.
Yet, the future role of S106 remained confused, contested, and fluid on the central government policy development stage.
In December 2001, New Labour’s newly re-elected second term government published Reforming Planning Obligations: A consultation Paper – Delivering a Fundamental Change (DTLR, 2001) that criticised the S106 process, proposing that to secure a “faster, more efficient and more effective planning system”, LPAs should instead use more standardised and generalised tariffs rather than individually negotiated S106 agreements, which in future should be limited to where they were “clearly justified to deliver, for example, site-specific requirements”.
But within two years, in November 2003, another consultation document: Contributing to Sustainable Communities – A New Approach to Planning Obligations, proposed that LPAs should be empowered to offer an upfront pre-set “optional planning charge”, set in advance but variable between LPAs and between different types of development, which developers could choose to pay as an alternative to negotiating both S106 planning and affordable housing obligation(s).
That new policy proposal, in turn, was put on ice by the publication in March 2004 (following an interim report in December 2003) of the Barker report that Section 2 will discuss.
The then-prevailing view on planning obligations was generally lukewarm at best, marked by a sense that their unpredictability and uncertain impact justified a shift towards alternative mechanisms, such as up-front standard and fixed tariffs.
Shelter, for example, had, in its response to the government’s December 2001 consultation, stated that “We agree with the government’s analysis of the faults of the current system of planning obligations. We consider that a ‘tariff’ system will offer much in the way of clarity of expectations on developers, faster procedures, and easier quantification of the benefits and how they are applied”.
Circular 05/2005 was published into this slipstream of prevailing and continuing policy uncertainty concerning the future scope and coverage of planning obligations.
While confirming the optional planning charge outlined in the November 2003 consultation would not be introduced until the government decided its response to the 2004 Barker report, including to her flagship PGS proposal, its focus was rather on the policy acceptability of planning obligations and the process/procedure used to negotiate and secure them in the context of the “improvements to the current system which the Government would like to make in the interim period before further reforms are brought forward”.
In practice, the circular remained extant – as did Circular 11/95 – until it was replaced by the National Planning Policy Framework in March 2012. It thus proved more of an unintended consolidation and watershed than an interim response.
Its Annex B reaffirmed that that planning obligations could be used to:
- prescribe the nature of a development, such as requiring a proportion of a development to be affordable;
- compensate for loss or damage caused by a development, such as a loss of an amenity by securing in-kind or cash from a developer;
- mitigate an impact of a development, for example, through the funding of transport, health, or educational provision improvements to “make acceptable development that otherwise would be unacceptable in planning terms”.
A ‘functional or geographical link’ between such obligations and the development should exist save for affordable housing, and they should be “fairly and reasonably related in scale and kind to the proposed development and reasonable in all other respects”.
The Global Financial Crash (GFC) then intervened to throttle the housing market and thus reduce the scope for developers to cross subsidise affordable housing from market sales. Many developments stalled and even across developments that were then subsequently built out S106 affordable housing obligations were often scaled back or not implemented.
Many commentators argued that public investment in affordable housing should be increased as part of a classis Keynesian domestic counter cyclical fiscal response to the GFC.
Housing capital expenditure instead took the brunt of fiscal austerity measures that George Osborne, chancellor of the 2010-15 Conservative and Liberal Democrat government, put in hand to ostensibly reduce the deficit but also part of a wider strategy to ‘shrink the state’.
Average grant levels were cut by up to 60% in total. Funding for new social rented housing – largely replaced by an affordable rent sub- tenure offered at c80% rather than 50% market rental levels – ended as policy presumption shifted towards providing affordable housing without public grant subsidy.
RPs, working in partnership with both councils and developers, were forced to work ever harder to devise and implement new affordable housing provision and funding models.
This turbo charged the tendency already begun during preceding decades for RPs to become developers of schemes, using sales of market housing to cross-subsidise rented dwellings let generally at sub-market levels, to purchase dwellings off-peg from developers to then offer on affordable terms, often in accordance with S106s agreed and made with LPAs.
An associated and intensifying secular trend was for such developer RPs to grow larger in size and turnover through takeovers, consolidation, and merger, as well as from organic growth. This was to increase their borrowing capacity and balance sheets and to benefit from economies of scale and scope.
The impact of fiscal austerity on national affordable housing capital budgets and on local budgets generally meant that when the housing market again took off at least across economically buoyant and areas concentrated around London and other high housing value areas that RPs increasingly relied on nil grant S106 to provide social housing.
Nil grant S106 affordable completions increased more than fivefold from a 2011 trough, occasioned by the GFC, to exceed 30,000 during 2019-20 – accounting for more than 50% of total affordable completions that year (see previous link to Table 1).
Between April 2017 and March 2021, the proportion of social rent completions enabled by nil grant S106 in England exceeded 50% each successive year, while for intermediate tenures, the proportion so enabled touched 65% in 2017-18, although subsequently that proportion has dropped.
S106 without public grant had become the primary funding source of affordable housing: an essential component of the mixed public and private funded welfare state across the housing sphere.
In many ways, a remarkable outcome. It represented, at first glance, a part privatisation of the funding of social and affordable housing, enabled by locally negotiated S106 agreements that, in effect, represented a locally levied and collected development tax or charge on speculative market developments, with its value or proceeds provided-in-kind or hypothecated for local affordable housing as a contractual commitment(s) linked to specific development(s) .
These outcomes were a product, not of first order political design or agency or competing party ideology or preference, but primarily one of incremental pragmatic responses of stakeholders responding at a local level to the inability of both the housing market and the planning system to deliver affordable housing or balanced communities in tenure and social compositional terms and to changes in the wider political and policy environment.
Planning policy at a national level initially largely followed evolved practice on the ground ratified by judicial case law decision, and then responded to conditions of post-GFC fiscal austerity.
S106 was also not specifically designed by central government to effectively recycle windfall landowner and development gains into affordable housing and other public purposes; indeed, until the nineties using it for that purpose was officially discouraged, if not prohibited.
The academics that have advised the government and House of Commons select committees on mechanisms to capture land value estimated that by 2018 that c30% increased land value resulting from residential development of greenfield sites was captured by the combined operation of CIL and S106, with up to another 20% captured by national capital gains and stamp duty land taxes.
The accidental antecedents of S106 partly explain why the level and composition of developer affordable S106 contributions lack predictability, related to uncertainties caused by contingent market conditions, top variant site attributes and circumstances, to the availability or otherwise of SHG, as well to the relative negotiating position/skills of the parties.
The process overall has tended to be piecemeal, reactive, cumbersome, hampered by the fact that information that is shared between the parties has tended to be asymmetrical and imperfect.
The non-exhaustive list of problems catalogued below have often cited in successive consultations by both government and stakeholder respondents as a reason to replace S106:
obligations are mostly attached to major housing schemes that many authorities only infrequently face and progress, causing problems related to LPA lack of experience and capacity in dealing with such applications;
- the complexity of such large-scale schemes and lack of policy certainty on contribution amounts and rates can result in protracted negotiations that consume much local authority and developer time and other resources, to the especial detriment of small and medium housebuilder enterprises (SMEs);
- asymmetries in negotiating expertise exist between the two parties, leading to unsatisfactory public policy outcomes related to above, for example, Southwark case example;
- a site- and locally negotiable system, rather than one subject to certain requirements known in advance, mean that both local authorities and developers are not always aware of the level of planning contributions that might reasonably be expected from a given development, resulting in obligations varying between areas and applications otherwise substantially similar;
- besides such local discretion in treatment, such variation is an inevitable by-product of a process sensitive to changes in market conditions (a rising or falling housing market impinges on development values and developer profits and hence perceived, claimed, or actual scheme viability) that can also result in substantial downward negation or revision of previously agreed negotiations as, for instance, did occur in the wake of the GFC, and could be occurring now with the recent housing market downturn;
- affordable housing levels achieved on a site-by-site and LPA level can therefore diverge markedly from published local policy requirements, which in the past has and can lead to developers to assume less than policy compliant levels of affordable housing when bidding for land, resulting in higher land prices and development costs generating a self-fulfilling circular process;
- A stated headline affordable policy requirement – say 35% – in any case cover a range of compositional permutations of social rented and intermediate tenure options that in realisation vary in value to the LPA and in cost to the developer both over time and between LPA’s;
- associated problems of lack of process transparency;
- other potential sources of contribution, including commercial and smaller developments, are left untapped;
- S106 scheme contributions towards community infrastructure and/or site mitigation can be meshed more to stakeholder budgetary imperatives rather than local needs;
- possible tendency of some local authorities to misuse Section 106 to delay or discourage development, by asking for unreasonably onerous levels of developer contributions;
- possible generation of perverse incentives in favour of high-density housing schemes deemed most likely to maximise contributions and to protect developer profit levels, thus risking over-development or sub-optimal social outcomes, such as compressed space and other standards;
- long time lags between the negotiation, the agreement, and the receipt of contributions;
- inadequate monitoring of the delivery of originally negotiated obligations, whether due to their renegotiation, to changes to planning applications or their non-progression in full or part, or to simple shortfall when the development takes place, can result in LPAs not getting the full benefit of contractually committed obligations. A May 2022 audit of affordable housing delivery, annually undertaken by the London Borough of Southwark, for example, identified in 21 cases of apparent under-provision of social rented units and 39 pertaining to intermediate, with another nine no responses, indicating a potential significant under delivery problem. There is little or no reason to suppose that a similar problem does not exist across other such authorities.
This long and apparently damning inventory of problems and issues associated with S106 fails, however, to recognise the progressive improvements in practice, such as use of standard templates, learning by doing and from experience, and the movement towards more consistency and certainty in national and LPA policy and practice, all of which has gathered pace in recent years.
Focused initiatives such as the Mayor of London’s Affordable Housing and Viability Supplementary Planning Guidance (2017 SPG), incorporated into the 2021 London Plan, that introduced a streamlined Fast Track Route for applications that include commitments to provide at least 35% cent affordable housing, and 50% on public or redeveloped industrial land has provided greater policy certainty to developers and London LPA’s hat by embedding the costs of defined and more certain affordable housing requirements into land values has served both to increase the level of achieved contributions and to speed up the planning process.
Undoubtedly S106 is a second-best public policy response to the need to fund and provide additional affordable housing and connected local cumulative infrastructural requirements.
But that bald statement begs the question as to what is and would be the best response.
The parallel and co-ordinated reform of public and private and business models to mainstream affordable housing provision most efficiently at optimum volume and public subsidy levels combined with a distributional fair land value tax attached with minimal distortionary economic deadweight effects would be one candidate. Like others, however, it is not immediately realisable for a mix of political and institutional reasons.
And an evolved and known second best is still better than third or fourth best or even possibly improved second best alternatives that, however, will involve upheaval and are uncertain in outcome.
At root such alternatives will suffer also from similar or other problems intrinsic to all land value mechanisms that seek to combine certainty with flexibility, when a ‘one-size fits all’ approach rubs against the reality of divergent spatial and site characteristics and circumstances, as subsequent sections will now go on to demonstrate.
2 Barker’s Planning Gain Supplement (PGS): a partly hypothecated national tax to support local infrastructural funding
Gordon Brown, a chancellor forever focused on stamping his authority on New Labour domestic policy, appointed Kate Baker, a former Bank of England economist to examine how improved supply responsiveness of the housing system could reduce the impact of rising real house price levels on the wider macro economy.
Her March 2004 (following an interim report in December 2003) Barker Review Final Report (Barker) concluded that Section 106 in its existing form it “did not offer the best method to achieve needed higher levels of housing supply”.
It proposed a national direct levy or tax on development betterment – the Planning Gain Supplement (PGS), to be levied when full planning permission was granted.
Barker envisaged that PGS would generate proceeds sufficient to cover the estimated Section 106 contributions that (in the absence of PGS) would have been made plus additional resources to boost housing supply and for associated infrastructural and other requirements but set not so “high to discourage development”.
Section 106 planning obligations (S106) could then be “scaled back” to cover site-specific impact mitigation and affordable and/or social housing requirements only (R24).
To finance their wider cumulative infrastructural requirements, Barker envisaged that local authorities (LPAs) should receive from central government a direct but unspecified share of the PGS proceeds generated within their areas.
Should the government decide against introducing PGS, Barker suggested that it alternatively should then press ahead and introduce instead an up-front pre-set and fixed tariff or charge that could still be set to vary between LPAs and types of development, however.
This had been proposed in the November 2003 consultation document Contributing to Sustainable Communities – A New Approach to Planning Obligations” that developers could choose to pay on a scheme-by-scheme basis as an optional alternative to negotiating S106 planning and affordable housing obligation(s).
However, Barker emphasised that this alternative was a second-best response that was likely to involve continuing prolonged and costly section 106 negotiations covering large and complex schemes.
As is conveyed by the above, Barker painted her canvas with a broad brush, leaving much of the crucial detail left to be filled in later, including:
- the difficulties of establishing the point in time when the uplift in value on which PGS should be levied;
- whether the computation of current use value should reflect ‘hope value’; (projected planning uplift attributed to an expected or possible future planning permission);
- whether PSG should be levied on the landowner or on the developer or on both;
- the precise and respective future coverage and impact of PSG and Section 106 on affordable housing provision;
- the impact of a national uniform tax levy on the development viability of sites possessing variant geographical, locational, and physical characteristics;
- whether low value brownfield development should be exempted;
- the PSG rate itself, and whether it should be a uniform UK rate or made regionally or locally variable, or applied differently across the devolved administrations;
- whether it should be applied across all developments save for householder improvements, or be targeted towards housing developments above a defined minimum threshold value;
- whether the supply of land available for development would be reduced by landowners withholding it as PGS was capitalised into lower land prices;
- whether, and in what proportion, PSG should be re-distributed between authorities, rather than simply directly allocated back to the originating LPA;
- the need or otherwise for transitional arrangements to cover existing planning applications and industry practices, such as option agreements, where the developer had had paid the landowner for an option to purchase their land in the future.
The canvas then began to be filled in by a chain of government consultations, select committee reports, subsequent responses, and then policy announcements pertaining to PSG, including the HM Treasury response to 2005 consultation; the 2006 Pre-Budget report; the Planning Policy Statement 3 (PPS3) issued in November 2006; Planning Obligations: Practice Guidance; the November 2006 Select Committee Report on PSG; the Government response to November 2006 report; the Changes to Planning Obligations December 2006 consultation; and the November 2007 government response to Valuing and Paying for PSG consultations.
The upshot, broadly taken across the piece of that process, was that PGS, when implemented, should:
1 Be set “at a modest rate across the UK” – some commentators took that to mean c20%: in short, a simple and modest (depending on viewpoint and/or interest) flat rate national tax on development, provided with limited exemptions.
Alternatives could include a lower rate for brownfield sites possibly supplemented by tax reliefs or credits targeted to support urban regeneration, “subject to further investigation”.
2 PGS revenues should be separated from the local government funding settlement.
At least 70 per cent of PGS revenues sourced from a local area should be hypothecated (ear-marked) to support infrastructure priorities within that same area.
3 Liability for PGS would not arise until after a developer – following the granting of full planning permission – had applied for a PGS Start Notice, signifying that they intended to commence site development.
4 That liability would then be calculated by subtracting the current actual use value (CUV) of a site (actual site values were preferred over taking a measure of average local values due to their variability and heterogeneity – each site is different – from its post-planning permission value (PV).
So: (PV – CUV) x PGS rate (%) = PGS liability.
Two separate valuations therefore would be required to determine PGS liability: one, to establish the CUV of the development; and the second to establish its PV.
5 PSG for each eligible site was to be paid by its developer (the entity implementing the planning permission) on the assumption that it possessed a notional unencumbered freehold interest with vacant possession (FHVP) of the site in question.
The government had concluded that site developers were best placed to accommodate the costs of PGS during the normal commercial negotiations they concluded with landowners to bring sites into development.
Having only one legal entity to account to HMRC for the site PGS liability, it was envisaged, would simplify the valuation process.
6 Section 106 should be scaled back to cover only “direct impact mitigation” at the site level, including the physical environment of development sites: their access connectivity; the direct mitigation of any arising adverse environmental impacts, relating, for instance, to landscaping, or other specific archaeological, environmental protection considerations; or other related site requirements.
The crucial – albeit by then established – exception was that securing affordable housing in a residential or mixed-use development at a proportion set within the relevant Local Development Framework (LDF) Plan should remain within the scope of S106.
7 The provision of such affordable housing was considered to constitute an on-site delivery issue that needed to be integrated from the outset into the site development process.
This was considered consistent with the wider achievement of mixed communities, in terms of their tenure and price offer, as well as their household compositional mix, including families with children, single, and older people.
The November 2006 PPS3 (see earlier link) had required LPAs to set an overall (plan-wide) affordable housing target(s), split, where appropriate, between social and intermediate housing categories, based on “an assessment of the likely economic viability of land for housing within the area, taking account of risks to delivery and drawing on informed assessments of the likely levels of finance available for affordable housing, including public subsidy and the level of developer contribution that can reasonably be secured”.
This represented an official acknowledgment that S106 affordable housing obligations had become integral to national and local affordable housing provision supply.
The national minimum indicative minimum size threshold for such affordable housing obligations was reduced to 15 dwellings. Local authorities, however, were offered the discretion to set a lower threshold, where that was “viable and practicable”.
8 Social or community infrastructural requirements, including leisure, educational, health facilities, in future, would fall outside scope of Section 106, to be funded from PGS or other sources.
In summary, to meet three different requirements:
- the on-site mitigation of adverse consequences of development;
- the funding of local infrastructural requirements connected with new developments;
- the provision of local affordable housing,
the government, on the back of the Barker report, proposed two primary policy instruments.
First, S106, scaled down to the still considerable twin-tasks of making a development acceptable in planning land use terms and of expanding affordable housing supply.
Second, a mechanism, PGS, a national tax on the uplift in site development values when crystallised by relevant planning approval(s), to fund necessary supporting community infrastructure.
The cumulative infrastructure funding issue
Site-related planning considerations can straddle wider community-related educational, transport, and other infrastructural needs.
Take, for instance, a site access connector road – clearly a site-related consideration – feeding into a new relief road, where that, given the expected impact of the new development on traffic flows, was also assessed as necessary to reduce congestion across the wider settlement spatial area,
When built, however, such a relief road could well reduce future traffic congestion within the wider area – even with the addition of the traffic generated by the new development, to below to what was experienced before it was built – at least if and until a new congestion ‘tipping point’ was reached when congestion became worse than it was before it was opened.
A new level crossing or road bridge over a railway that Network Rail, for instance, deemed necessary due to the increased traffic it expected a new development would generate, is another example of such a ‘tipping point’ effect.
They can apply to increased provision of school places, GP surgeries, and other items of community infrastructure that expand future system capacity across a wider pool of users than future residents of a proposed development but are lumpy in terms of their associated fixed cost requirements, when may not always be possible or appropriate to expand provision incrementally on existing sites, such as providing a new classroom.
Logically, these ‘tipping edge’ and ‘cumulative funding’ problems can be overcome – and often are – by a S106 contribution made proportionate to the assessed impact of a new development on existing and future local cumulative infrastructure needs,
Indeed, B21-24 of Annex B of Circular 05/2005 advised that LPAs should set out in advance the need for such wider (not confined to individual site mitigation purposes) supporting cumulative community infrastructure, such as health and educational facilities, and the likelihood of a contribution towards them being required.
In such cases, a direct relationship between the development and the supporting infrastructure required and that the contribution sought was fair and reasonable in scale should be both demonstrated. A clear audit trail should then be maintained between the contribution made and the infrastructure provided.
It went on further to say that developer contributions could be pooled, if necessary, across different developments and local authority areas and that “In some cases, individual developments will have some impact but not sufficient to justify the need for a discrete piece of infrastructure. In these instances, local planning authorities may wish to consider whether it is appropriate to seek contributions to specific future provision”.
Yet such contributions, especially when they need to be combined with existing LPA and/or external agency resources available for infrastructure works, often prove insufficient to allow the desired infrastructure to proceed prior, or in parallel, with site development.
They can also prove difficult to quantify and apportion to individual items of infrastructure and on what planning and provision basis.
Whether the impact of the development on needed infrastructural provision constitutes a ‘tipping point’, can consequentially risk become becoming a source of negotiating complexity, contention, and delay.
In the case of the relief road example, if the contribution only augmented the existing pot available for such a project but not enough to allow it to proceed, congestion would worsen in the meantime. Similarly, school and GP surgery excess demand and overcrowding could result.
Such ‘tipping point’ and associated cumulative funding co-ordination problems are increasingly highlighted or even exploited as reasons to resist such new development, as discussed in The 2020 Planning White Paper: Key Lessons.
PGS, development viability and affordable housing obligations
Another issue not resolved by the post-Barker consultation policy development process was the extent that the retention of section 106 affordable housing obligations could be supported and paid for by developers within a new regime that also included PGS.
In short, could a PGS levied, at say, a national 20% cent uniform rate across England co-co-exist with S106 affordable housing as well as some limited site mitigation obligations, without its introduction undermining the viability of future developments and then ultimately housing supply?
The 2007-2010 Brown government itself recognised that for section 106 to operate effectively in parallel with PSG, then the legal, policy, and funding pegs on which affordable contributions were to be hung needed to be made clearer and more certain, concluding that “a contribution by the developer in the form of, or equivalent to the value of, the land necessary to support the required number of affordable units on the development site would represent a reasonable starting point for negotiations”.
That treatment, however, still left open on how such land contributions could be combined with the proposed PSG, as well as other valuation issues connected to geographically or spatially variant land values.
As it turned out, the proportion of planning obligations accounted for by land contributions progressively fell over subsequent years.
Why did the PGS fail even to reach the runway?
Post-war policy experience of taxing development betterment values at a national level was not encouraging.
The three main legislative attempts to do so in 1947, 1967, and 1976 proved singularly unsuccessful, both in terms of revenue raised and in securing greater land supply for development.
Developers held back on the expectation that the high levels of tax involved (100% in 1947) would prove unsustainable and would be reversed by a successor government.
The prospects of the future success of PGS were, therefore, not promising from the outset.
Notwithstanding the lower rates envisaged by Barker, PSG could still involve a disincentive for developers to seek permission, or then to start work.
Practical issues concerning its timing also remained unresolved. The post Barker consultations proposed that valuation would occur when full planning permission was granted for a development with payment due 60 days after works commenced.
But development values could change between the date that planning permission was granted for the development and the date when it commenced: the scope and cost of remedial or other site preparation work could increase, for instance.
The largest developments also often involve multi-phasing over a prolonged period, the treatment of which would have likely complicated the operation and timing of PGS, quite likely encouraging developers to structure and sequence schemes to minimise their liability to pay it.
Alternatively, if PGS was assessed against final development value, measurement and timing issues could remain, while a delayed receipt profile could prove a problem for LPAs needing to fund supporting infrastructure – especially if they were prevented from forward-financing such works.
These issues will likely pertain to the emerging new Infrastructure Levy, discussed in Section 4, when introduced.
In any case, a hammer was thrown into the post-Barker policy development process when the 2006 Pre-Budget Report indicated that PSG would only be implemented, if “after further consultation it continued to be deemed workable and effective; and, in any case, no earlier than 2009”.
Hardly a ringing commitment to begin with, reflecting doubts within and outside government as to whether PGS was workable.
Delaying the earliest date of its introduction to the year prior to a general election, in effect, represented a pre-announced death sentence for PGS.
Developers, unsurprisingly, exploited the enveloping uncertainty to mobilise against PGS, with their lobbying efforts coalescing around the introduction of alternative standardised tariff approaches, involving a fixed per square meter rate, rather redolent of the standardized tariff approach that had been proposed in another earlier December 2001 Reforming Planning Obligations consultation.
Some LPAs, including Milton Keynes and Ashford, responding to continuing central encouragement to “experiment using such standard charges”, did set such tariffs.
The most high-profile example was the Milton Keynes ‘roof tax’. It involved a fixed tariff set at £18,500 per dwelling and c£66 per square meter of commercial floor space and was designed to raise £311m towards the c£1.7bn total scheme costs of extending the UK’s largest and most successful new town.
This tariff, however, did not cover the cost of affordable housing: section 106 contributions of c£316m towards affordable housing were still needed, but overall the tariff was considered an effective and efficient way of funding infrastructure.
Such a proportionate and certain tariff was considered conducive to streamlined development planning and delivery and to securing broader stakeholder acceptability.
But by 2008, the UK, like other advanced economies, was entering the grip of the Global Financial Recession (GFC) that, inter alia, threatened to bankrupt the domestic housebuilding industry.
An election was also approaching, when, for the first time for a generation, the formerly hegemonic New Labour ‘project’ – already running out of political steam and ideas – faced the real prospect of electoral defeat.
Whatever remnant government enthusiasm for PGS rapidly ebbed away until it was finally put out of its misery and discarded in favour of the Community Infrastructure Levy.
3 The Community Infrastructure Levy (CIL)
Introduced in the 2008 Planning Act, CIL became operative on the 6 April 2010 through regulatory statutory instrument 2010/48 (CIL Regulations 2010). It was then retained by the incoming 2010-15 Conservative and Liberal Democrat Coalition government. CIL was not adopted in Scotland.
CIL was designed to act as a specific standalone statutory source of local community infrastructural funding (except for affordable housing), replacing the blurred and uncertain role that S106 provided in default for that purpose.
Unlike the previously proposed PGS – a national tax – it was designed to be locally set and collected and to be voluntary.
A 2011 DCLG Overview of CIL laid out the government’s aim and justification for the scheme, setting forth the expectation or hope that it will prove “ fairer, faster and more certain and transparent than the system of planning obligations which causes delay as a result of lengthy negotiations. Levy rates will be set in consultation with local communities and developers and will provide developers with much more certainty ‘up front’ about how much money they will be expected to contribute”, enabling “the mitigation of cumulative impacts from development”.
It envisaged that CIL would be levied across smaller developments untouched by S106, noting that (then) “only 6 per cent of all planning permissions brought any contribution to the cost of supporting infrastructure”.
Regulation 122 linked the Levy to a parallel scaling back of planning obligations, limiting such obligations, save for the provision of affordable housing, to site specific measures directly related to the development, that were fairly and reasonably in scale to it, and were necessary to make the same development acceptable in land use planning terms.
It continues as a core feature of CIL and S106, providing continuity to guidance dating back to Circular 16/91, while putting the treatment of planning obligations that Circular 05/2005 set out onto a statutory footing.
Regulation 123, as enacted in 2010 (later amended, prior to its recension in 2019), prescribed that after a CIL charging schedule (CS) had been approved and published, LPAs could not use a planning obligation(s) to fund or provide items of infrastructure that it had included in its ‘Regulation 123 list’ – one detailing items or types of infrastructure intended for local CIL funding – or where such a list was absent, from supporting the provision of any item of infrastructure (double dipping).
Otherwise, only five or less planning obligation contributions could be pooled to help fund for an item of infrastructure not locally intended to be funded by CIL and included in its regulation 123 list (pooling restriction).
These restrictions aimed to encourage LPAs to adopt CIL as their future source of funding for local cumulative infrastructural requirements and to confine S106 to site specific and affordable housing provision obligations, avoiding any overlap funding of local infrastructure between CIL and S106, with CIL becoming the preferred vehicle for the collection of pooled contributions.
Pooling restrictions were lifted in 2019, however, while ‘regulation 123 lists’ were superseded in 2020 by a requirement on LPAs to produce annual infrastructure funding statements, defining developer contributions received (both through CIL and section 106 obligations) and detailing how they had been spent.
Subsequent published Guidance in 2014 remains extant, as updated. Its main provisions are summarised below.
- CIL is a voluntary and local charge on local new development providing over 100m2 additional floorspace – complications, however, soon arose concerning the precise definition and application of additional, occasioning subsequent and successive revisions to the regulations.
- LPAs must define local CIL rates in a local Charging Schedule (CS). Charges become payable when full planning permission is granted and “material operations” commence on site.
- CIL charges involve a straightforward pound per square metre rate, but such rates can vary or differentiate according to the type and size category of developments and their area location, as well as to whether it counts as a ‘strategic’ within each LPA (such different charging classes must be defined in the approved CS).
- Each proposed CS, prior to its formal adoption, is subject to a defined consultation process and to a local viability review/test, followed by a Public Examination.
- When setting its CS, LPAs are required, according to the guidance, “to strike an appropriate balance between securing additional investment to support local development and the potential effect of the Levy on their viability”.
- On adoption, CS rates set across each defined charging class are payable as specified and applicable. They are consequently not negotiable nor variably discretionary on a site-by-site basis, outside or contrary to the provisions of the applicable CS.
- In short, the local LPA decision whether to adopt CIL is voluntary, but CIL liability when due is each development’s intended gross internal metre square floor addition times the applicable rate set out in the CS for that development, indexed broadly in line with construction costs: its application is then not discretionary or variable.
- Following the enactment of the 2011 Localism Act, LPAs were empowered to design CSs that encouraged the devolution of planning to a more local level, including making provision for the earmarking of a proportion of CIL receipts to support new chargeable development subject to a designated and approved Neighbourhood Plan.
- The scope of exemption or reliefs from CIL were widened to encompass social housing, charitable, self-build, residential annexes, and additions, and to some cases of demolishment, of refurbishment, and of change in use – these were also subject to subsequent definitional and other regulatory revisions.
- CIL proceeds cannot be used to fund the provision of local social or affordable housing.
They can, however, fund a very wide range of other local infrastructure, including roads and other transport infrastructure, drainage schemes, flood defenses, schools, hospitals and other health and social care facilities, parks, green spaces, and other environmental improvement, as well as leisure and other local facilities, “arising from the cumulative impact on local infrastructural needs of successive developments, including those made subject to the Levy”.
CIL progress and operation in practice
A Review of CIL operation and progress commissioned in 2016 but published in February 2017 to accompany the Housing White Paper (HWP), noted that although it had been slow to start, the process of CIL introduction and of CS adoption, five years from its outset, had begun to pick up and accelerate.
Yet, by August 2015 only 93 LPAs (27%) had adopted a CS, reflective of an introduction period marked by frequent and, according to LPA and developer respondents, often confusing, regulatory changes, as touched on above. Another 109 LPAs were identified as working towards CS adoption.
When added to an already onerous and cumbersome adoption process, such changes tended to undermine timely and effective implementation of CIL by LPAs.
The narrowing of the charging base occasioned by the regulatory extension of exemptions and reliefs also prompted complaints from many LPAs concerning consequent loss of potential receipts.
By mid-2015 around 200 (58%) authorities had either adopted a CS or had begun the process to do so: representing a partial and delayed rather than a comprehensive and universal response to CIL, reliant as it was on local introduction and implementation.
Where LPAs, however, had put in place a CS for two years or more, average year-on-year revenue yield, according to the review, had risen from an average of £0.2m per charging authority in 2012-13 to £0.5m in 2013-14, before rising sharply to reach £2m in 2014-15.
That upward but lagged trend from a very low base reflected that receipts could not begin to be generated until the CS consultation, examination and adoption process was completed and then the ensuing time lag between CIL liability notice issue and revenue receipt – an issue that is likely to be repeated with IL.
CIL in 2015, according to respondents, represented a relatively minor development cost of around two to three percent of total market development value. As an average computed across all charging authorities that figure masked higher charges levied on developments across high value areas more able to withstand higher CIL rates.
A more technically-based review, A New Approach to Developer Contributions, (CIL Review Team Report, 2017 or 2017 Review), also published to accompany the February 2017 HWP, suggested that CIL raised 15% to 20% of cumulative infrastructural requirements, leaving the remainder to be found by LPAs.
Local authorities were then suffering from the concurrent infliction of post-2010 fiscal austerity that reduced some relevant revenue budgets by more than 50%.
This review went on to note that CIL was generally levied only at a “significant” rate on residential and retail development: other commercial uses to encourage local “economic growth” usually attracted a zero or low rates.
Relying on CIL to fund supporting infrastructure for large developments also served to shift development risk onto LPAs despite developers often being best placed to shoulder such risk.
Liz Peace, the chair of that review, in her later evidence to the 2018 Select Committee on Land Value Capture said it was difficult and, for the very largest developments “almost impossible to apply the formulaic CIL approach”.
Where, for example, a new school was required, developers “did not want to pay that into a pot and wait for the local authority to build you a school in however, any years’ time it would be: you wanted the ability to do that on your site in kind”.
Her review concluded in 2017 that “CIL is a more appropriate mechanism for capturing infrastructure funding to mitigate the cumulative impact of smaller scale developments. However, it would be more appropriate to have maintained s106 as a mechanism for delivering on-site infrastructure requirements for large-scale sites. The issue of upfront infrastructure cost for large-scale sites is still an obstacle to delivery whether under CIL or s106”.
It proposed replacing CIL with a low level, broad but certain and mandatory Local Infrastructure Tariff (LIT): “a twin-track system of a (low level) Local Infrastructure Tariff (LIT) combined with Section 106 on larger sites”.
By bringing smaller and nonS106 sites into the contribution net and thus increase proceeds beyond levels then currently realized by CIL, such an LIT would thus capture the “best of both worlds”, as well as offer regulatory simplification and process streamlining when integrated with the Local Plan process, while the retention of S106 on larger sites would allow more substantial infrastructure needs to be met in a timely manner by the stakeholder/agents best placed to do so.
A standard, but locally sensitive, national £ per square metre formula “pegged and calibrated to local prevailing values”, was suggested, set between 1.75 and 2.5% of the sale price of a standardised 100 square metre three-bedroom family home divided by 100, which the review posited should obviate the need for a complex Public Examination process, removing layers of complexity and potential delay, and would have a marginal impact on viability within low value areas.
How it would operate in practice was far from clear, however, as the government later highlighted.
The 2017 Review acknowledged that replacing CIL would involve upheaval and associated transitional issues but concluded, in effect, that the certainty provided by a mandatory low level LIT was worth such disruption, even though a low level LIT would generate insufficient resources to pay for affordable housing in addition to much other supporting and cumulative infrastructure requirements, requiring S106 negotiation of affordable housing requirements to continue.
Essentially, the 2017 Review was itself unable to juggle the conflicting pressures that Table 1 will shortly catalogue, most notably that between the advantages offered by certainty and flexibility: a low level certain and uniform tariff set low enough not to undermine development viability across low value areas or development types will not secure the maximum possible feasible land value capture across high value areas/development types and thus require much cumulative infrastructure to be funded by other methods and sources.
Certainly, the government did not take on board the review’s proposals for LIT to replace CIL. It chose instead to undertake a March 2018 consultation focused on the combined operation of section 106 and CIL (2018 consultation), describing the current system of developer contributions “too complex and uncertain”.
The proposals this consultation made were largely limited to “first step” short-term incremental modifications to the existing combined CIL/S106 developer contributions regime.
These aimed to streamline in time and process terms the statutory CIL adoption process, to allow the pooling of section 106 contributions in CIL-adopted LPAs (later extended to all areas in para 25 of the government’s response to the consultation), along with the publication of annual Infrastructure Funding Statements.
It did flag, however, that “in the longer term… one option could be for contributions to affordable housing and infrastructure to be set nationally, and to be non-negotiable”.
Like the 2017 Review, it also extolled the Mayor of London CIL scheme – a low-level tariff charged across all London boroughs confined in scope to funding key transport infrastructure, mainly CrossRail – as an effective mechanism to finance visible a strategic infrastructural item(s), noting that since its introduction in 2012, £381 million had been raised against a £300 million target, without much fuss.
The Local Democracy, Economic Development and Construction Act 2009 had created and empowered new Combined Authorities (CAs) to carry out the same functions as the Mayor of London (the direct election of metro-mayors for such CAs was also allowed in 2014) and to charge CIL.
By 2016, CAs covering the former county jurisdictional areas of Greater Manchester, South, and West Yorkshire, and the West Midlands, (councils which had been abolished with the Greater London Council, in 1986) had been freshly created to strategically plan and coordinate regeneration and economic development activity across their respective conurbations/sub-regions.
The 2018 consultation, in that light, also proposed that CAs should be empowered to introduce a low-level Strategic Infrastructure Tariff (SIT) on the Mayor of London model to “increase the flexibility of the developer contribution system, and encourage cross boundary planning to support the delivery of strategic infrastructure”.
Subsequent progress on that proved slow, however. Successive governments have preferred to progress devolution deals with individual CAs.
A later 2020 Review of the wider operation of CIL and its impact alongside the planning obligations system, confirmed that the tempo of CIL introduction and implementation had continued to quicken during the second half of the decade.
Mainly based on survey responses from LPA and other stakeholders, focused on the 2018-2019 financial year, it reported that in April 2019, just under half – 155 of 317 potential LPA charging authorities in England (after the reorganization and boundary reorganization of that month, and exclusive of Mayoral, Combined, National Park authorities) – were by then charging CIL.
Given that another 67 were progressing CIL, around two thirds of English LPAs, nearly a decade after its introduction, had either adopted or issued a CS.
By 2018-19, the value of CIL levied by LPAs had risen to £830 million (not necessarily collected), with a further £200 million levied by the Mayor of London,
compared to a combined developer contribution (S106 + CIL) figure of c£7bn for that year, including £4.7bn for the provision of affordable housing provided through S106.
The c£1bn contribution made by CIL to that £7bn total remained relatively small beer.
CIL coverage is very geographically uneven. Over half of contributions were accounted for by London and South-East LPAs in 2018-19, reflecting their higher locational development values with nearly all London authorities charging CIL compared to 21% across the North-West.
Many Northern and Midlands LPAs, where development values were generally much lower, were correspondingly less able to levy CIL at significant level, even on residential developments – at least without either eating into potential affordable housing provision or threatening the commercial viability of some developments.
By the same token, CIL rates, when set not to undermine perceived development viability across such areas, were reported as barely sufficient to justify local implementation cost. Lack of local capacity to implement CIL provided a further and related problem.
LPAs in that position have generally continued to shun CIL.
In operation, it remains spatially concentrated – both in adoption and receipt generation terms — within the more economically buoyant and affluent parts of the country that has left some swathes of the country almost untouched.
Was CIL doomed by design or by central government mismanagement and neglect?
Two key deliverables were expected from CIL. First, it should help to streamline the development process and produce associated efficiency and timeliness benefits.
Second, to generate net additional resources for local infrastructural provision without any associated loss in affordable housing provision.
Successive reviews, summarised above, identified long gestations in the CIL adoption process, followed by inevitable delays in building up or augmenting receipts to reach a point sufficient to fund lumpy required community infrastructure items.
When combined with a central proscription on LPAs forward funding infrastructure on the back of future expected CIL revenue flows, these delays put an effective lid on the short- to medium term infrastructural funding capacity of LPAs.
That lid, along with the transitional problems engendered by having to operate in parallel for a prolonged multi-year period the previous S106 system for planning permissions that had been agreed prior to local CIL adoption, were intrinsic to CIL design.
Another problem was that CIL viability testing (assessment of what developers could be expected to pay, depending on assumptions made) was often made across an individual LPA, rather than at a more granular area or project, basis.
The upshot was that viability was often assessed locally on a pan-LPA ‘worst case’ basis, thereby reducing potential total future receipt generation capacity, especially across low value areas, further fueling LPA perception across such areas that CIL was not ‘really worth the candle’ for them.
Frequent changes in the regulations – S106 pooling of obligations and the fluctuating technical treatment of the coverage, extent, and timing of reliefs provided prime examples – caused further confusion and uncertainty for the stakeholders that needed to operate the new system, as did the imposition of second or third order objectives, such as the decadal tack towards neighbourhood planning.
While the discretion and flexibility provided to LPAs in devising charging schedules did, however, provide some scope for variations in local development conditions and values to be taken on board, such local variation lessened certainty: in short, a ‘one-size fits all’ more certain approach rubs against the reality of divergent spatial and site characteristics and circumstances.
Practice could vary significantly between LPA; a tendency that was driven also by differences in local institutional implementative capacity.
Taken across the board, these scheme features tended to confuse, if not discourage, LPA staff and other key stakeholders, including developers, in their implementation effort, dashing initial hopes that CIL would prove “fair, fast, simple and transparent” in operation.
These problems help to explain why CIL remained a work in progress a decade after its introduction, and why it took that long for scheme receipts to even approach the levels that were anticipated at its inception.
Table 2 below identifies issues and problems that will continue to apply, regardless of whether CIL and/or Section 106 is either reformed or replaced by IL.
These need to be mitigated and managed rather than compounded by policy actions across design and implementation stages.
|Issue and/or Design Parameter|
|1||Simplicity, uniformity, and certainty at a national level versus flexibility of treatment and incidence at a local area and site level.|
|2||Securing revenue-generation sufficient to meet locally cumulative infrastructural requirements versus development viability, whether at an area or project basis.|
|3||The definition and assessment of development viability and its constituent parameters, including assumed developer profit and landowner premiums.|
|4||The related extent that national or even LPA-wide tariff-based systems and possible supplemental mayoral strategic infrastructure levies and other parallel mechanisms, notably site negotiable S106, can achieve increased public land value capture.|
|5||The funding and provision of lumpy infrastructure projects that become cumulatively ‘necessary’ at a point before sufficient resources from slowly uncertain accumulating revenue funding streams are realized to pay for them – the tipping point and cumulative funding problem – at least in the absence of centrally provided capital subsidy, delegated forward funding approval(s) or alternative new local funding sources.|
|6||Securing the co-operation and funding input of other public authorities (such as county councils with education powers or Network Rail) or agencies (such as the Highways Authority) that possess funding profiles and priorities often different from that of LPAs.|
|7||The ability and capacity of new school and improved transport connectivity provision not only to make a marginal new development acceptable in planning terms, but also to facilitate or to make possible future development – the ‘crowding-in’ funding effect central to strategic regeneration schemes, such Barking Riverside and Oxford and Cambridge Arc.|
|8||The receipt gestation and other transitional problems that any new scheme would involve and/or need to overcome.|
|9||The related prospect of having to operate legacy systems, including CIL and S106, in parallel with a prolonged introduction of a new mechanism.|
|10||The establishment of robust local processes that prioritise infrastructure needs and then match associated spending profiles to supporting funding streams or sources and that then effectively and transparently monitor resultant outcomes.|
|11||The resourcing and capacity of LPA planning departments to operate in an efficient and timely manner such schemes in accord with their purported objectives.|
This section began by noting that CIL was introduced as an alternative to a proposed mechanism, PGS: an explicit national tax on development value crystallised by planning permission.
Although CIL, unlike PGS, was designed to be voluntary and locally based, allowing some local flexibility in rate-setting and treatment, it still constituted – both in intention and effect – a local levy on development value: proceeds could be used to plug existing or to meet future deficiencies in local infrastructural provision not necessarily directly related to any chargeable development.
Its introduction reestablished the principle of taxing land value betterment, albeit this was only tacitly recognized by government at the time.
CIL was undermined by design and transitional problems leading to its patchy local implementation, crucially compounded by a continuing lack of overarching central government policy clarity and certainty.
Any steadfast national public policy commitment to securing increased infrastructural investment in line with local affordable housing requirements and economic development needs likewise was notable only by its absence.
Such an absence of overarching political commitment and drive will invariably undermine any replacement to CIL, namely the new IL, included in the Levelling-Up Bill expected to receive Royal Assent in 2023. To that, we now turn.
4 The emerging IL
The August 2020 the Planning for the Future White Paper (PWP), announced an intention to replace the Community Infrastructure Levy (CIL) and the current system of planning obligations with a new nationally set, value-based flat rate charge: the Infrastructure Levy (IL).
The IL did not emerge into the PWP out of thin air. Its antecedents can be traced back decades to the often-official espousal of alternative tariff approaches to S106, some of which were discussed in previous sections, grounded on a perception that these could offer greater predictability and certainty and thus reduce delays and costs.
S106 obligations, in any case, could include tariff-like requirements set on a per dwelling basis. Barker herself in her 2004 report was receptive to such a treatment.
The PWP took on board the tentative long-term preference of the 2018 consultation (itself influenced by the 2017 CIL Team Review) for a nationally set and non-negotiable levy to replace CIL and S106.
In that light, it proposed that CIL and Section 106 should be consolidated into a nationally set, mandatory value-based flat rate Infrastructure Levy (IL), levied as a fixed proportion of the final development value of sites or schemes above a minimum threshold at the point of occupation.
The PWP expected the new IL to raise more revenue and to deliver at least as on-site affordable housing as the existing combined CIL and S106 developer contribution system did without the “months of negotiation of Section 106 agreements and the need to consider site viability”.
It would also deliver more of the infrastructure that existing and new communities required by “capturing a greater share of the uplift in land value that comes with development”.
Permitted development rights were to be included in the scope of IL, so that additional homes delivered through this route could provide funding support for new infrastructure.
LPAs could specify the forms and tenures of the on-site affordable provision required, working with a nominated affordable housing provider (Provider), who could purchase the dwellings at a market-discounted rate.
That discount (the difference between the price at which the unit was sold to the Provider and the market price) would then be considered and costed as an in-kind delivery component of the IL that would then be subtracted from the developer’s IL liability for that site, prefiguring the ‘Right to Require’ included in the March 2023 consultation, discussed below.
Few of the 44,000 respondents to the consultation that followed on to the PWP felt that the new proposed levy would in practice increase on-site delivery of affordable housing, however.
Most, including the Royal Town Planning Institute and Shelter, expected it instead to reduce such provision. A survey of social housing providers found that only four per cent of respondents believed that the PWP proposals would deliver more homes for social rent and help to deliver mixed communities.
Although linking IL liability to realised development values was welcomed by some commentators, many also pointed out that its corollary was that some infrastructure necessary for development completion would need to be forward financed by LPAs,subjecting them to both development and funding risk, echoing a criticism made by the 2017 Review of CIL.
The PWP had indicated that LPAs would be permitted to borrow against IL revenues to forward fund infrastructure, as well as be bound by a new nationally determined local housing requirement, which they would have to deliver through their Plans at a local level consistent with the stated government aspiration of “creating a housing market that is capable of delivering 300,000 homes annually, and one million homes over this Parliament”, focused on areas facing the highest affordability pressures.
But when in parallel to the August 2020 PWP consultation, the government proposed associated interim changes to the standard method of assessing local housing needs that would produce figures in aggregate more aligned to its 300,000 national target, following NIMBY opposition within and outside parliament during that autumn, they were withdrawn within three months.
Proposed changes to the NPPF, published in December 2022, according to assessments undertaken by Lichfields and Savills, will reduce future housebuilding levels to around half of the that target, to c155,000 or lower (not taking account of the impacts of any prolonged housing market downturn).
Legislative provision for the IL to replace CIL in England was made in Part Four of the Levelling-up and Regeneration Bill (LURB) introduced into the Commons in May 2022.
That shift to a locally determined rate represented a key departure from the PWP design, which, following previous consultations, proposed a nationally determined rate.
As such, it reflected recognition that it was not possible to combine certainty linked to uniformity with the flexibility in rate-setting needed to both to maximise potential land value capture across high value areas and to maintain development viability across low value areas, given the greatly variant development and site circumstances that prevail across and within LPAs.
During LURB’s passage through the Commons, MPs expressed concerns that the indeterminacy and lack of design detail of IL risked future complexity and uncertainty – contrary to stated intention, as well as doubts as whether it would secure developer infrastructural and affordable housing contributions comparable to the current combined CIL and S106 system, let alone more.
In March 2023, DLUHC issued a technical consultation on the detailed design of IL, indicating that further consultation would follow when the necessary secondary regulations needed to enact it were published.
According to LURB (as amended) and the March technical consultation, IL will:
- Largely replace existing CIL and S106 contributions towards community infrastructure and affordable housing in England (not Wales), except for the London Mayoral Levy.
- Apply to all types of development including permitted development, except for defined exemptions.
- Be calculated and collected as a set percentage of the Gross Development Value’ (GDV) of completed and sold developments above a minimum threshold level (on a £ per m2 basis), below which it will not be charged, “broadly meaning that the Levy is charged on the increase in land value created by a development”. Provision for staged or interim payments may be made, subject to the government response to the March technical consultation and later regulatory development. Constituting, in effect, a tax on completed sales value of a development, rather than a set and then fixed percentage of the additional floorspace approved at point of planning permission, regardless of its future value, IL should, according to the government, allow “developers to price in the value of contributions into the value of the land, allow liabilities to respond to market conditions and removes the need for obligations to be renegotiated if the gross development value is lower than expected; while allowing local authorities to share in the uplift if gross development values are higher than anticipated”.
- Rates and minimum thresholds to be locally set that could vary according to sub-area or type of development, according to a typology of development typical to each individual LPA.
- Charging schedules must pay regard to development viability and will be subject to public consultation and Examination, subject to Secretary of State intervention. In that light, rates and minimum thresholds set across applicable site typologies should “balance the need to capture land value uplift with the need to ensure that development remains viable” and that landowners are sufficiently incentivised to release sites for development.
- Be mandatory. Deadlines for its implementation at LPA level will be centrally prescribed, with the rider that each LPA will have at least 12 months to implement.
- Involve introduction of a new ‘Right to Require’ for LPAs, allowing them to determine a non-negotiable proportion of IL that they should receive as in-kind onsite affordable home contributions of value “at least as much onsite affordable housing” as does the existing system. The precise measurement of that benchmark, involving the quantification of value of the affordable housing so provided and the associated detailed operation of the ‘right-to-return’, will be subject to subject to the government response to the March consultation and later regulatory development.
- Require developers to deliver infrastructure defined as “integral” to the operation and physical design of a site – such as on-site play areas, site access and internal highway network or draining systems – through planning conditions. Where this is not possible, integral infrastructure will be delivered through targeted planning obligations known as ‘Delivery Agreements’. All other forms of infrastructure – ‘Levy funded’ infrastructure – mostly community infrastructure, will be collected in cash through a ‘Core Routeway’, save for the operation of the ‘Right to Require’. The dividing line between ‘Integral’ and ‘Levy-funded’ infrastructure will be set in subsequent regulations, policy, and guidance, informed by the March 2023 technical consultation process.
- Restrict S106 otherwise to an ‘Infrastructure In-Kind Routeway’ where “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 (using the Core Routeway). A ‘S106-only Routeway’, where IL will not be collected, will apply when GDV is not calculable or where buildings are not the focus of development, such as minerals or waste sites. LPAs to set out in their local Plans the routeway applicable to distinct kinds of site after future regulations set an overarching framework for IL to operate in, also subject to further consultation.
- Allow forward funding through borrowing and use of reserves by LPAs to finance local infrastructure, subject to further regulatory development.
- Be staggered in implementation to allow a ‘test and learn’ approach to be applied over several years, so “allowing for careful monitoring and evaluation, in order to design the most effective system possible”. The earliest expected time for ‘test and learn’ LPAs to introduce IL is expected late 2024-25 with operation beginning in 2025-26.
- Require LPAs to prepare and publish Infrastructure Delivery Strategies, setting out how they intend to spend IL income, with other infrastructure providers required to assist their preparation, subject also to Public Examination, and:
- Sites permitted before the introduction of IL in each LPA will continue to be subject to their CIL and section 106 requirements.
- It may be possible for LPAs to spend IL receipts on recurrent service provision, subject to future regulatory regulation.
As ever, and as reported above, much will depend upon future detail, including how securing ‘at least as much’ affordable housing will be measured – a metric that in size and tenure composition terms differs significantly between authorities and can change over time with changing local circumstances and needs.
The technical consultation suggested that the most appropriate measure may be the value of the average cumulative discounts of affordable housing secured over an extended period at a LPA level, to reflect differences and changes in type and wider market conditions secured over the period selected.
It further noted that across some high value areas, the total value of the in-kind affordable housing provided could exceed the total IL liability.
Likewise, the consultation recognised that where the threshold for the Infrastructure In-Kind Routeway is set – which could range from a 500 to 10,000 dwelling qualifying threshold – will have significant implications for the final design of IL. Another big problematic issue with an uncertain answer.
A lower threshold would allow greater scope for developers to deliver infrastructure as an in-kind contribution, while a higher threshold is likely to be associated with greater uncertainty and negotiation.
For instance, as to whether additional community infrastructure, such as a new school or GP surgery, was required to mitigate the direct impacts of – and thus were integral to – the site, or rather reflected wider cumulative impacts of population growth, and/or both.
The opportunity, problem, and risk profile
The primary potential advantage posited for the introduction of IL is that it possesses the potential to raise more revenue in a more certain way than can CIL.
First, it would be mandatory and have wider coverage than the the combined discretionary S106 and CIL system.
Second, its calibration to a percentage of final development value rather than to a fixed percentage of additional development floorspace approved at point of planning permission, as is the case with CIL, allows for greater development upside – whether that results from wider market conditions, the commercial success of a particular development, or the innate profitability potential of some types of developments – to be captured for public purposes.
Back in May 2019, the Scottish Land Commission advised Scottish ministers that a financial modelling exercise it had conducted with the Scottish Futures Trust, comparing the emerging model of an Infrastructure Growth Contribution Levy (IGC) – then contemplated for possible introduction in Scotland – with the Community Infrastructure Levy already established in England, had concluded that IGC would offer a more effective tool for land value capture.
This was attributed to the IGC’s “non-linear formula” calibrated to development value and because it would apply to “most developments”.
IGC, it was envisaged, would continue to operate alongside S106 (S75 in Scotland) and unlike IL would be levied at point of planning permission, but has not been subsequently introduced.
Most recently and relevantly, modelling and case study evidence assembled by a research team highly experienced and expert in the area reported in an evaluative study (the 2023 study), commissioned by the DLUHC and published in February 2023, suggested that substantial scope existed for IL contributions to exceed total developer CIL plus S106 contributions in the case of greenfield residential developments located across LPAs with high housing values.
This modelling, across a range of LPA case examples, compared potential IL proceeds obtainable at an estimated lower bound – calibrated to the scale of total developer contributions expected from within the existing system from a policy compliant scheme – and an estimated upper bound defined “as the maximum rate at which IL could be set whilst maintaining benchmark land value (sufficient to incentivise the landowner to release) and a 15% internal rate of return (IRR) to the developer”.
Proceeds from levying IL on warehousing, purpose-built student accommodation, and some other types of development largely untouched by the current scheme, could also increase aggregate proceeds beyond existing levels.
Other potential advantages could include greater certainty as to the scope and coverage and quantum of developer contributions, thus reducing the need for negotiation.
The 2023 study went on to point out, however, supported by qualitative local authority interview evidence, that most of the potential advantages posited for IL, depend upon assumptions that tend to conflict with reality on the ground or it could introduce further complexities and problems, and/or replicate the problems encountered by CIL.
The core driver and justification of IL is to increase proceeds for infrastructural investment. But increased CIL rates and extended its coverage to include permitted development, commercial development, and reduced exemptions could do likewise.
The government, reprising the findings of the latest published August 2020 CIL review, itself recognised in its recent March 2023 technical consultation that, when charged, CIL increased developer contributions available for infrastructural provision.
60% of CIL charging authorities reported increases in land value capture following its introduction, while 38% of non-CIL charging authorities believed that it could enhance value capture.
An incidence shift to a value-based levy on final realised development value might offer the prospect of greater proceeds and upside for LPAs, especially during the rising period of national and local economic and housing cycles.
But equally, it could result in downside risk and could involve prolonged asymmetrical negotiation and scrutiny with uncertain outcomes – a problem and issue that was raised during the consultations concerned with PGS.
IL proceeds are still likely to be geographically concentrated in high value areas, while the truncation of S106 will tend to break the contractual link between scheme development and infrastructural provision that it can provide.
Achieving “a similar level of affordable contributions” based on past contributions is likely to prove problematic to measure.
Setting and measuring the benchmark in a way that reflects the messy reality of divergent past practice will prove complex and challenging and is likely to be mired in confusion and uncertainty.
Even if the past pattern of developer contributions was achieved in practice and they reflected current requirements, it would not represent a net system improvement, certainly when transitional and implementation costs are factored in, unless IL was also successful in generating additional overall proceeds that could then be used for local community infrastructural development.
That begs the question as to the overall point of such a complex and indeterminate exercise, if it is to simply measure whether the local operation of IL is likely to provide as much affordable housing contributions as before, even though that level – even if accurate – may not provide a good base to meet current and future housing need requirements, consequently requiring further negotiation at a local level to realign them in line with changing national and local policy and other conditions.
Some further problems are obvious and stark: the setting of charging schedules will not necessarily synchronise with local Plan-setting processes, and will not in the future, unless the local Plan-making process becomes much more streamlined and truncated. That seems simply wishful thinking rather than a credible assumption.
More likely is that the introduction of IL will further complicate the Plan-making process, providing more excuse and reason for delay at a local level, thus not only self-defeating much of the purported purpose and intention of IL, but further undermining the wider working of the planning system.
IL will also need to run in parallel with a legacy CIL and Section 106 system for many years, that is if it gets off the ground: precisely the same transitional problem that bedeviled CIL across its early years, engendering the associated confusion and uncertainty that made it a target of criticism and replacement of previous successive consultation cycles, as a range of stakeholder organisations underlined in a June 2023 letter to the Secretary of State.
The long and apparently damning inventory of problems and issues associated with S106 that section 1 documented have long been the butt of successive government consultations, but as that section pointed out, progressive improvements in S106 practice, attributable to the use of standard templates, learning by doing and from experience, and greater consistency and certainty in national and LPA policy and practice, has weakened the force of some of these criticisms.
Proposed replacements, including PGS, the use of standardised tariffs, LIT, and now IL, all recognised the need to retain S106 in some shape or form.
As section 3 discussed, and Table 2 identified, many of the problems connected with CIL were a product of political mismanagement related to a lack of overarching commitment to first order objectives, including increasing infrastructural investment closer to needed economic and social levels, and/or to design problems inherent to any land value capture mechanism that aims to combine the advantages of national policy certainty with needed local flexibility in implementation.
Increased levels of public investment and the setting of supportive arrangements for LPAs to forward finance necessary local infrastructure provision consistent with economic and housing supply outcomes, also stares into the jaws of the real fiscal crisis of the state: unwillingness or inability of government or political parties seeking electoral majorities to tax or borrow sufficiently to provide resources to secure the outcomes expected and/or needed.
A related danger exists that allowing IL proceeds to be used to support recurrent revenue budgets that they become a substitute for central government revenue support and/or local tax sources or stockpiled rather than used to fund local cumulative infrastructural requirements.
Some of the authors of the government commissioned 2023 evaluation study of IL have questioned whether significant simplifications to S106 and CIL could achieve similar goals with less damaging disruption and delay, for example, by: using a fixed tariff instead of CIL for smaller sites (say, up to 100 dwellings for residential and an equivalent for commercial) for affordable housing and site mitigation with no exemptions so better linking funding to requirements (retaining CIL only for Mayoral CIL (London and combined authorities) for sub-regional/regional infrastructure; retaining Section 106 for larger for more complex sites requiring discussions and negotiations while using a partnership-type approach, as suggested by the Letwin Review, for very large sites, and, more ambitiously and optimistically, ensuring that Local Plans are in place that clearly state infrastructure requirements.
5 What should happen in 2024
IL will not become operative until 2024 at the earliest when its initial introduction could coincide thereabouts with a general election that autumn.
A new government, if it secured a working majority would then be able to decide whether to proceed with IL, as the incoming Cameron government did in 2010 with CIL, whether combined with parallel or interim reforms to CIL and S106 and to what extent, or to shelve it altogether.
The core concern and conclusion of this website is that the upheaval, confusion, and policy blight that would follow the introduction of replacement IL proceeding fitfully in parallel with the existing CIL and S106 systems withering on the vine for a decade or more, is likely to result in more harm than good.
The lesson of the CIL implementation process was clear enough and should be learnt this time round.
The design and transitional problems that afflicted CIL, set out in section 3, were largely the result of policy uncertainty and fluctuation, a necessarily long gestation period combined with slow and patchy take up, all compounded crucially by a continuing lack of overarching central government policy commitment, all risk repeating with IL.
It simply seems astonishing that the government appears to believe that introducing another complicated reform attached with a long receipt gestation and learning curve period that will still need to run for many years in parallel with, the existing CIL and S106 legacy systems – running with three or more horses, in effect – will prove a positive catalyst and support of local infrastructural and affordable housing supply, rather than either policy blight and upheaval or both for LPAs for much of the next decade or beyond.
The Laurel and Hardy song concerning the successive unsuccessful efforts of the comic but relatable duo, as removal men, to transport a grand piano down a tenement block staircase rather comes to mind:
“We were getting nowhere … so we decided to have another cup of tea” – paraphrased here to – “after many years of getting nowhere, we were finally getting somewhere, if not that different in destination from where we started from, but after another cup of tea (aka: policy review/initiative in this case) we decided to start again from the beginning and get nowhere again for a while”.
Unfair poetic license, perhaps, insofar that the process undertaken by DLUHC has served to highlight the potential for more land value on greenfield sites to be captured and has suggested a more systematic approach to the costing and the obtaining in kind affordable housing contributions.
That said, it must be expected that the net present value of the distant and uncertain benefits that IL might generate a long time in the future, if realistically discounted, will be low at best and more likely negative. And, of course, a decade on past form it will be time for another disruptive reform.
Putting in hand ‘working with the grain’ incremental reform to, rather than a complex replacement of, the existing ‘present imperfect’ CIL and S106 systems, focused on the issues identified in Table 2 seems to offer a more sensible way forward.
Such changes should include setting clear process arrangements for the forward financing public funding of infrastructure to help to ‘crowd-in’ future development, the definition and application of development viability with reference to land value mechanisms (whether IL, CIL or S106) that can best reconcile national certainty with needed local variation, securing greater consistency of, and certainty in the application of S106 affordable housing contributions at both central and local levels in a way that could tap effectively into the potential for increased land value, where that was present.
There also could well be merit in introducing as a mandatory default a low level LIT for those LPAs lacking a CIL schedule.
As the previous section noted, CIL coverage could be widened and deepened. CAs or at least the Metro Mayors could be empowered to levy a SIT where they could demonstrate that its proceeds are needed to unlock locally economic enhancing development through pump priming specific infrastructural additionalities, such as new transport links and stations.
Allowing LPAs to retain higher proportions of locally levied business rates could facilitate local infrastructural provision assisted by prudential borrowing.
In that light, the second core conclusion of this website, is that any new government should address and progress the first order design issues that Table 1 set out that before committing to IL or any new scheme.
Ideally, some variant of IL could be piloted as a demonstration project alternative in Scotland, where CIL is not levied, but that depends upon the consent and support of the Scottish government.
Most fundamentally of all, any future reform to be successful requires the necessary overarching political and policy commitment to be present on a sustained basis. Without that, nothing is likely to succeed.