How can reform ensure the Levelling Up Bill’s new Infrastructure Levy is a success?

The new levy needs to ensure more certainty for developers and more freedom for local authorities.

Blog post published on 18 May 2022 by Anthony Breach

The current approach to funding infrastructure is bad

When new homes and employment sites are built and occupied, demand for infrastructure, including transport and public services, rises. There is a strong argument for requiring the land value uplift from development to pay for new public infrastructure, to reduce the congestion costs imposed on the rest of the community.

There are a number of ways this mechanism is currently delivered, but the most common is referred to as Section 106 (S106). This essentially allows local authorities to ensure that developers give contributions towards infrastructure, either in cash or in kind as conditions of receiving a planning consent. ‘Developer contributions’ raised £7 billion in 2018/19 from development, with 85 per cent of that revenue coming from S106.

Putting it bluntly, S106 is a terrible form of taxation and the problem is the case-by-case process by which it is negotiated. All too often negotiations end up bogged down in trench warfare between the local authority and the developer, each trying to maximise/minimise the level of the contribution available. These debates about “viability” result in everyone wasting time and getting bad value for money.

The Infrastructure Levy would be good

The proposed Infrastructure Levy would change this by switching the contribution from S106 to a flat rate, based on the gross development value of the finished development. Rather than negotiating for everything case-by-case, the developer would just hand over the cash, and the local authority would then pay for everything it needs.

This is what Centre for Cities recommended back in 2019 in our report Homes on the Right Tracks, by Professor Paul Cheshire and Bonnie Buyuklieva. We estimated that, in conjunction with building 1.8-2.1 million new homes at suburban densities in green belt land within walkable distances to key train stations, a 20 per cent Infrastructure Levy would raise between £93bn and £116bn.

Both sides would win from this arrangement. Instead of having to bargain with developers claiming higher levels of contributions are unviable, councils get more funds to spend on infrastructure to mitigate the congestion problems that come with growth, while developers benefit from having total up-front certainty about what level of contribution is expected when acquiring land and making planning applications, minimising delays.

The Infrastructure Levy should be certain, yet flexible to use

That’s the theory, anyway. Getting the levy done in practice will be more complicated, and the reforms will have some additional layers to address this.

First, the Government has said that the levy will be locally set, partly in response to concerns that a flat rate for England would prevent development in places with lower land values. This would be a feature rather than a bug and the Government should be cautious about allowing too much variation in the levy.

An approach where the highest and lowest possible rates are banded may be a good bet. A similar logic of restraint also applies to the different rates for different types of development (greenfield vs. brownfield, commercial vs residential). Some differentiation may be justified, but the Government will have to be careful to avoid a frothy multiplication of varying rates and exemptions, as has emerged in the existing business rates regime.

Second, S106 will actually remain in the law, nominally to deal with the largest and most complex schemes, where it is argued it makes more sense for the developer to deliver everything all at once. Ideally this would not be the case, as the temptation will be for local planning authorities to stick with what they know.

An implication of the levy is that local authorities should deliver or contract out more new infrastructure separately. This will mean levy revenues will need to be used to build capacity in local government, such as more funding for planning departments, so that it can do a job it and S106 cannot currently do. Local authorities should also be allowed to borrow prudently against future expected revenues from the Levy to get infrastructure lined up and ready for new development.

Reform should try to deliver on the original bargain of the Infrastructure Levy – more certainty and speed for developers, and more resource and freedom for councils.