Government moves to replace state funding with developer contributions means we need to rethink the whole system

thumbnail_Paul Smith CROP

As the era of austerity rumbles on, an increasingly controversial element of the planning system is the question of how much developers should contribute towards physical and social infrastructure improvements in return for the grant of planning permission. There are growing calls for the state to secure a larger share of the increase in land value when planning permission is granted, and recent changes to planning policy certainly indicate that the government is moving in that direction.

Under the present system, councils aren’t allowed to ask for payments towards whatever they want – instead, the requirements for what can legitimately be funded through planning obligations are set out in law. They must be necessary to make the development acceptable in planning terms; directly related to the development; and fairly and reasonably related in scale and kind to the development.

That means, for example, that councils shouldn’t request financial contributions to tackle existing problems that the development would make no worse, or to replace existing expenditure. Any payments should therefore be unrelated to the value of the land – provided they aren’t so large as to render development unviable.

The government has been slowly moving more towards a more explicit system of land value capture – taking the biggest slice of the pie possible for the state

Starting with the revised National Planning Policy Framework last summer, the government has been slowly moving more towards a more explicit system of land value capture – taking the biggest slice of the pie possible for the state.

Another significant step was made in that direction with updates to planning practice guidance last month. An updated section on education contributions explained that, although the government funds the provision of new school places based on forecast shortfalls of capacity, they would reduce the amount paid to councils to take account of developer contributions.

For the first time, the government is being explicit that developer contributions are replacing government funding.

It’s not entirely clear how this meets the legal tests – if the government was going to fund it anyway, it can’t be a consequence of the new development. Education contributions are an odd area anyway since new homes don’t actually create new children – they just redistribute existing ones. There is already a squeeze on school places taking place as a result of a spike in the birth rate in 2008, meaning we would need new school places in many areas regardless of whether any housing development took place.

This change neatly illustrates how unsatisfactory the current system is. The actual use of developer obligations is becoming increasingly far removed from their legal and theoretical underpinning and is looking more and more like land value capture.

The actual use of developer obligations is becoming increasingly far removed from their legal and theoretical underpinning and is looking more and more like land value capture

This fudged position is beneficial to nobody. It means the precise level of contributions that any particular development will attract is difficult to ascertain. Often, the level of contributions isn’t known until after a planning application is submitted, which delays permissions while contributions are negotiated and thereby slows the delivery of new homes. In a competitive land market, the developer whose estimate is furthest away from the council’s eventual request is the most likely to win the site – and so the most likely to end up submitting a planning application and discussing the appropriate level of planning gain with the council.

The approach of site-by-site negotiation also results in piecemeal expenditure on isolated projects rather than large scale, transformative investment. While contributions have to be spent close to the development that generates them, trying to take the biggest slice of value possible out of any given site also results in the highest levels of contributions accruing in the most affluent areas – where the expenditure is needed least. Those communities where house prices are low may receive little or nothing.

There is nothing inherently wrong with a system of planning gain based on land value capture rather than the needs created by each new development. If that is the system we want, though, let’s be honest about it and come up with the most effective, transparent system we can.

There is nothing inherently wrong with a system of planning gain based on land value capture – let’s be honest about it, though

The more transparent the system, the easier it is for developers to reflect in their offers for land and the easier it is for land owners to accept they will have to pay it.

This wouldn’t need a complicated new approach – there are a variety of ways this can be achieved using current structures. The Raynsford Review, for instance, suggests having a higher rate of capital gains tax on receipts from land sold for housing development. Some industries – like North Sea oil – have industry-specific tax rates; perhaps a similar approach could be applied to housebuilders.

These changes needn’t increase the overall financial burden on new developments. The state already secures a significant proportion of the uplift in land value when planning permission is granted. Taking into account the aggregate of receipts like planning gain, SDLT, capital gains tax and corporation tax, around 50% of the uplift is captured currently, according to the House of Commons report, Land Value Capture.

They would, though, generate a large, central pot of money that could then be distributed by the government to fund specific projects regardless of where the money was raised – a National Infrastructure Fund. This would enable higher levels of expenditure in the areas that need it most, as well as the delivery of more ambitious, large scale projects.

A simple, transparent system that can deliver the physical and social infrastructure that communities need to grow, would surely be an improvement for everyone.

Paul Smith is managing director of the Strategic Land Group

Read more from Paul Smith: The Housing Delivery Test: a flawed approach