Community Development Innovations in the UK: Planning, Financing & Contracting

1. Community Development Innovations in the UK: Planning, Financing & Contracting PROFESSOR STEPHEN J. BAILEY UNIVERSITY OF TAMPERE Stephen.Bailey@uta.fi

2. Planning Community Development • privatisation of property rights in UK • but nationalisation of development rights • UK local govts • responsible for planning community infrastructure • in local & regional structure plans • administer national planning legislation • decide whether to approve planning applications • but developers may appeal if applications rejected

3. Financing Community Development in the UK • Sources of LG finance • borrowing • LGs previously required central govt permission to borrow • now via the Prudential Borrowing Framework • taxes • on property values & land values rising due to development • charges • for local govt infrastructure (schools, roads etc.) • Sources of private finance • developer contributions to LG infrastructure • PFI/PPPs

4. TAXING DEVELOPMENT OF LAND • planning permission increases the market value of land • local govts also provide infrastructure that further increases that value • so developers make considerable profits • taxes on profits go to central (not local) govt • so little or no direct financial return to LGs

5. INFRASTRUCTURE CHARGES • increasingly levied on developers in UK • when LGs grant planning permission • charges are related to • the cost of LG infrastructure • or the benefit received from it • easier to measure costs than benefits • so easier to justify cost-recovery charges

6. TAXES OR CHARGES? • tax rising value of land + planning permission • betterment taxes (on both old & new sites) • tax increment financing (to redevelop old sites) • charge for infrastructure provided by LGs • statutory national planning charge • or locally-variable community infrastructure levy • or both taxes and charges?

7. LOCAL BETTERMENT TAXES IN UK • planning gain/obligations • negotiated between developers and LGs • combines a charge & local betterment tax • for both ‘hard’ & ‘soft’ infrastructure • & for on-site & off-site infrastructure • developers can make cash or in-kind payments • speeds development if LGs lack finance • illegal if LGs are ‘selling’ planning permission • but negotiations commercially confidential so don’t know

8. Developers’ Views of P. Gain/Obligations • they accept a legitimate role for PG & POs • to recover the costs of LG infrastructure • but not to tax profits from development of land • they believe PG/POs have become a hidden tax • used to provide facilities not linked to the development • they argue that • planning permissions are being bought and sold • so market forces are changing LGs’ development plans • & negotiation causes long delays reducing their profits • so they are being ‘held to ransom’ by LGs

9. CHARGES/ TARIFFS • UK local govts can set standardised tariffs • for different types of development • they are not negotiated agreements • they are a hybrid payment incorporating both • a locally-determined infrastructure charge • & a local betterment tax • consistent with central govt guidelines • increasingly for ‘soft’ more than ‘hard’ infrastructure • for the whole community • rather than just for the site

10. Do Developers Actually Pay? • developers may pass on the tax or charge • forwards to purchasers of property • through higher prices for houses, offices, etc. • backwards to original landowners • through lower prices paid for land • or both backwards & forwards • so as to maintain profits • & to maintain payment of dividends to their shareholders • but landowners unwilling to accept lower prices • so development may be slower

11. Community Infrastructure Levy • CIL introduced by UK Planning Act 2008 • & came into force 2010 • CIL on per square metre of net additional floorspace • CIL will supposedly deliver: • much greater certainty about the legal basis for a charge; • a broader range of developments contributing to infrastructure; • greater transparency, certainty & predictability for developers • it is up to LGs to decide whether or not to introduce CIL • &, if so, determine the rates of CIL for their own areas • payments can be in-kind rather than in cash.

12. Accountability for the CIL • local govts must publish rates of their CILs • approval of rates depends on appropriate evidence • once approved, rates must be index-linked to inflation • LGs are required to report on their use of CIL revenues • CIL rates don’t have to be standardised over all the LG • So not a standardised Statutory Planning Charge • but a SPC is preferred by developers – not the CIL.

13. A LAND VALUE TAX? • LVT replaces all other taxes on land • & so is revenue-neutral • taxes ownership of all land • not just sites at a particular stage of development • taxes the whole of the land value • not just the rise due to planning permission • is levied annually on each site • not just when sites are developed • captures all gains in land values • e.g. as a result of transport improvements • taxes the value of land in its most profitable potential use • encouraging the efficient use of land

14. Other sources of private finance for community development • impact fees (USA) • levied on ‘rational nexus’ legal criterion • to recover tangible (not intangible) on-site costs • social cost tariffs (Canada) • flat-rate tariff to finance community infrastructure • recovers wider development costs (on+off site) • Business Improvement Districts • a form of PPP • financed by businesses in the BID area

15. Business Improvement Districts • used by municipalities in Canada, USA & UK • if businesses agree via a referendum to pay a levy • to finance extra services of direct benefit to their area • makes good business sense • if it prevents a shopping centre deteriorating • due to poor security, physical appearance & business image • more like a charge than a tax because • voluntary payment • for a direct benefit • ‘free riding’ is avoided • by making payment of the levy compulsory • if a majority of businesses in the area vote for it • levies are based on the principle of additionality

16. Limitations of BIDs • they have a very limited purpose • generally marketing, safety & security & cleaning • they have a short life span • of five years in the UK (but they can be renewed) • they have relatively high costs • of development & administration • they focus on short (not long) term investments • can only compel occupiers (not owners) of property to contribute

17. Contracting Community Development • contracts for infrastructure only • contractor builds then transfers the asset to LG • contracts for infrastructure & related services • via PFI/PPP contracts combiníng: • landowner • construction company • facilities management company • bank • Many problems with PFI/PPPs in UK

18. Conclusions: Planning & Provision • Planning • development highly regulated • no free market in land/property development • community infrastructure provided by • local govts themselves • or by developers via planning gain/obligations • or by PFIs/PPPs for both infrastructure & services

19. Conclusions: Finance • many ways of raising finance for infrastructure • but clear distinction between charges & betterment taxes • & clear rationale for both • some form of national &/or local betterment tax • plus a separate infrastructure cost-recovery charge • LVT is best form of betterment tax (comprehensive) • but charges for cost recovery are more easily justified