Everything to gain... by Nick Raynsford

1 Jun 06
& but also everything to lose if the government goes ahead with its proposal for a land tax on developers. Former local government minister Nick Raynsford outlines the problems, particularly on brownfield sites, and offers a 'sensible way forward'

02 June 2006

... but also everything to lose if the government goes ahead with its proposal for a land tax on developers. Former local government minister Nick Raynsford outlines the problems, particularly on brownfield sites, and offers a 'sensible way forward'

How do we pay for the infrastructure investment needed to support and facilitate the country's economic and social development requirements? This is a question that comes up again and again, whenever we are discussing issues such as the regeneration of our major cities, the implementation of the communities plan growth areas, or London's transport needs.

In a mixed economy, it is widely agreed that relying on public sector investment alone is neither adequate nor desirable. Indeed, there is a large measure of agreement that private interests who benefit from new development should contribute towards the infrastructure needed to ensure the success or mitigate the potential adverse consequences of that development.

But how do we capture a proportion of the development gain for this purpose? This is the Holy Grail that has eluded governments throughout the postwar period. The current proposal for a Planning Gain Supplement follows three previous attempts by Labour governments, in the 1940s, 1960s and 1970s respectively, to tax development gain.

All three failed, not least because with the Conservative opposition pledging repeal, developers simply postponed schemes to avoid paying the tax. The government, clearly mindful of that, is suggesting that the new PGS will be levied at a relatively modest level of 20% and possibly as low as 10% on brownfield sites, recognising their additional difficulties and costs.

Even with such concessions the question remains: will the PGS prove an effective means of capturing development gain to fund infrastructure?

There are serious grounds for concern. The first is to do with the concept itself. The PGS is predicated on the assumption that there is a significant one-off increase in land value when planning permission for development is granted. When the earlier development tax schemes were evolved, this was generally correct. It still applies to some extent, particularly with greenfield developments. However, today's more complex planning system allows value to emerge progressively through the various stages of plan development, so the uplift at the point when permission is granted might be less abrupt.

But on many brownfield sites the position is very different. Where there has been profitable prior use of the site, there might be little or no immediate uplift in value when planning permission is granted. Demolition and remedial costs and the need for discounted lettings in the early stages of development can effectively eliminate any such immediate gain. The site might well prove very profitable in future years as the new uses consolidate, but because the PGS relates only to the immediate uplift in value attributable to planning permission, that future profit will remain uncaptured.

The example of the large-scale regeneration schemes in my Greenwich and Woolwich constituency is instructive. Through the Section 106 procedure, the local authority has successfully negotiated very substantial developer contributions towards infrastructure and social and environmental provision. Yet because many of the sites, such as the Greenwich peninsula, required very expensive decontamination works, it is doubtful whether there was any significant uplift in value when planning permission was initially granted.

So why is the government proposing to replace S106 with the PGS? While S106 has worked effectively in some areas, the record is patchy. Some local authorities have proved far better than others at negotiating realistic contributions without inhibiting development. In other cases however, developers complain of protracted delays and unrealistic expectations. In other areas, authorities, perhaps stung by such criticisms, have secured far less than might reasonably have been expected in developer contributions.

The element of uncertainty and scope for delay makes the S106 process unpopular with many developers. The government is seeking to address these criticisms by substituting a universal scheme with a fixed percentage contribution.

However, this creates new problems because the level of profit that can be expected varies enormously from site to site. This is not always reflected in the increase in value attributable to planning consent. There is also the obvious risk that a fixed percentage contribution will either deter development if fixed too high, or result in a much lower contribution than is reasonable if set too low.

A further complication is the lack of a direct link between the contribution and associated infrastructure works, as applies with a S106 agreement. For developers, the knowledge that their contribution will result in specific improvements to local transport, housing, education or the environment makes it a more acceptable form of tax. The early opening of a school, health centre and ecology park in Greenwich Millennium Village certainly made this once heavily polluted brownfield site a more attractive proposition for house buyers in the early stage of the development.

But with the PGS, the link between contributions and infrastructure processes would be weakened as it is a national tax and only a proportion of the proceeds are guaranteed to go back into the area where the specific development is taking place.

To respond to these criticisms, the government has proposed to give local authorities discretion to negotiate a S106 agreement on top of the PGS, although its scope will be more restricted. This, however, has three disadvantages. First, a more restricted S106 regime will not fully compensate authorities seeking a contribution on sites where the grant of planning permission does not result in an immediate uplift in value. Secondly, developers are likely to look askance at what they will see as a 'double whammy' a supplement on top of the PGS. Thirdly, it removes the supposed benefit of the PGS in creating greater certainty for developers and eliminating delays caused by negotiation of the contribution.

There is a further difficulty created by timing. Although the point at which the PGS is assessed is the granting of planning consent, payment will not be required until the development begins. This will not help the financing of early infrastructure investment that might be essential or highly desirable.

So it is hardly surprising that the consultations about the PGS proposals have generated a great deal of scepticism and very serious reservations. Does this mean the government has to go back to the drawing board? Not if it recognises that the PGS is not a panacea but might work better in some circumstances than others. Its very design makes it more appropriate for greenfield developments, and were it to apply only in such circumstances many of the disadvantages could be eliminated. Indeed, it is arguable that if the PGS were restricted to greenfield sites it could be set at a higher rate than currently proposed to provide a fiscal disincentive to greenfield development.

But it would not be enough to restrict the PGS without seeking to tackle the problems that have beset S106, which would continue to be the main vehicle for capturing an element of development gain on brownfield sites. The issue of development certainty could be addressed by requiring authorities to adopt a more strategic approach, indicating in advance the type and scale of contribution likely to be required for particular types of development in the area. The Milton Keynes 'roof tax', which involves fixed tariffs related to specific infrastructure provision, is an interesting move in this direction.

At the same time, there is a pressing need to raise the general level of competence and confidence among local authority staff negotiating S106 agreements. Many do feel overawed when confronted with highly experienced developers. There is obvious scope to remedy these weaknesses through the use of consultants and the recruitment of more appropriately qualified staff. The Academy for Sustainable Communities, set up by Deputy Prime Minister John Prescott in April 2005 as a centre for skills and knowledge in this field, clearly has a role to play here.

A practical and incremental approach, linking what is known to work well at present with new elements introduced only when there is clear evidence that they will bring real benefits, looks like the most sensible way forward. Otherwise, we risk repeating the experience of the three previous development taxes, which were introduced in the face of controversy, failed as a means of generating funding and were repealed within a very short period of time.

Nick Raynsford is the MP for Greenwich and Woolwich and was local government minister from 2001 to 2005


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