17.03.2023

Technical Consultation on the Infrastructure Levy launches and it's ..... complicated....

Just when you think it is safe to step away from the computer and make a cup of tea, DLUHC launches not one but two *major* new consultations.

Both consultations run for twelve weeks, closing at at 11:45pm on 9 June 2023

This post is solely focused on the Infrastructure Levy Consultation*.

Unlike my usual *consultation alert* posts, I am not going to attempt to summarise the entire thing now. The consultation is simply too complex for that.

I am afraid that you are all going to have to read it, several times, ideally after downing at least one strong coffee.

Having been through it more that once at this point, my initial feelings are probably best summed up by the following Avril Lavigne Lyric:

Why'd you have to go and make things so complicated?

The system that is being proposed is *very* different from the one that we are currently using and it is most certainly not any simpler or more certain.

The consultation proposes:

IL rates that are set by local authorities and based on the final GDV of a development project
The rates would be a charged to the internal area (m2) of a development as a percentage of the final GDV (£ per m2) above a minimum threshold
a three stage payment process where:
- an "indicative" calculation is submitted along side a planning application,
- initial "estimated" payments are made after commencement but pre-occupation; and
- a final balancing payment is made once the scheme is completed or sold
three separate 'tracks' or 'routes' to infrastructure funding, whereby some developments fund their infrastructure solely through the levy, some solely through s.106 Agreements and some through a 'hybrid' route involving both IL payments and a new form of s.106 Agreement - now called a "Delivery Agreement"

The consultation seeks views on almost every part of how this system would operate - ranging from:

the definition of development to which the new levy should apply; and
how to distinguish between 'integral' infrastructure that would be provided by developers as part of a scheme; and "levy funded infrastructure" that would need to be delivered by local planning authorities; to
how rates are set,
the types of exemptions that should be adopted;
how affordable housing can best be protected;
how the payment process should work; and
how the new levy should be rolled out.

It is a LOT to get your head around in just twelve weeks - particularly when it is being run alongside two other extremely significant consultations*!.

The risks of the government getting this wrong are clearly set out in the Impact Report which has been published alongside the consultation.

That report highlights a number of significant risk areas associated with the proposed new system. Including the fact that the modelling undertaken** identified four distinct 'categories' of development:

Development models that demonstrate a ‘wide’ IL window. In these cases, local authorities may have significant flexibility in determining a rate between the estimated lower and upper bounds.
Development models that demonstrate a ‘narrow’ IL window. In these cases, local discretion over model outputs may be quite constrained.
The ‘new’ window - development models that would previously have been outside the system of developer contributions, but which would become liable under the proposed IL; and
Development models that are not viable under either the existing system or the proposed IL.

It probably won't come as a great surprise to anyone to learn that:

Category 1 (above) largely comprised green-field residential developments;
Category 2 largely comprised brownfield schemes - where the room for manoeuvre ranged from significantly more limited to non-existent;
the prospective viability of Category 3 varied dramatically (with PD schemes on average only able to bear a maximum IL rate of about 8%); and
Category 4 - which comprised models with a 'negative' window - was larger than some might expect. Four of the twenty four models on which the report was based ended up in this category - or 16.7% of the development types that were analysed.

The key findings from page 93 of the report are set out below, but it does need read in full. The passages underlined are my own emphasis.

"Key findings 

In this final chapter we identify 6 areas that represent important conclusions from the research undertaken.

The IL represents a fundamental shift in the process by which developer contributions would be sought and managed. The IL would be conceptually distinct from the existing system. The transition from a cost-based measure to a levy related to total sales income would represent a fundamental shift in policy with respect to developer contributions. This shift could entail a range of potential outcomes.
What might be the effects of changing the system by which developer contributions are secured? There are a range of potential implications of the potential introduction of the IL. For example, it may bring some developments into scope for developer contributions that have been effectively outside the terms of the existing system. There will also be significant new challenges for local authorities in making decisions about the levy including rates, thresholds and the location of large sites for the S106 routeway and taking these decisions through their local plan process.
How much funding might changing the system raise? There is potential to raise more but whether this can be realised compared with the existing S106 and CIL system depends not just on rates and thresholds chosen but on the extent of exemptions, how market participants react especially landowners, land promoters and developers, and the extent to which local authority borrowing costs in advance of receiving levy income reduces what is available to spend.
Are LPAs ready for the IL? There is likely to be variability between local authorities with regard to their readiness to implement the IL. CIL-charging local authorities may be in a stronger position to engage with the IL proposal than non-CIL charging authorities. However, it is likely that all local authorities will need clear guidance on the process by which IL rates and minimum thresholds should be defined prior to undertaking specific research to support the local implementation of the IL.
Further questions for decision makers. It will be important for decision makers to reflect carefully on the potential impacts of the IL on the development industry. For example, it is probable that the IL may prompt developers to reconsider both where and what they develop in response to the landscape of IL rates.
The scale of reform implied by the replacement of the existing system with the proposed IL is likely to take considerable time to implement. A range of possible scenarios are easily imagined over such a transition period: some developers may rush to get applications in before the introduction of the new, unknown, system; other developers may choose to expand their output once the rules are determined; still others may wait in the hope that the new system is itself subsequently modified.
Locally raised and spent IL will result in the highest value sites returning the greatest value of developer contributions. It is, therefore, possible that a shift to the IL would increase the geographic inequalities already evident in the current system. A process of testing, trialling and real-world learning could be helpful in establishing the effects of the IL"

In short this consultation is both complicated and very high stakes.

More detailed analysis will follow when I have properly managed to get my head around the proposals. If anyone would like to discuss them, then please do let me know. I suspect that we may need a LARGE number of working groups to do it justice.

In the meantime, I shall leave you with yet more Avril Lavigne***

Why'd you have to go and make things so complicated?
I see the way you're acting like you're somebody else
Gets me frustrated
Life's like this, you
And you fall, and you crawl, and you break
And you take what you get, and you turn it into

an entirely new system of developer contributions in England.... apparently

*Other members of the team are reviewing the Environmental Outcomes Report consultation as I type.

*! and one arguably less significant one - unless you have very strong views on minor changes to PD rights

**Which assumed that all sites modelled were capable of delivering a policy compliant development under the current system

*** Yes, she is my current consultation playlist and yes, I am singing along.

Consultation description
The Infrastructure Levy is a reform to the existing system of developer contributions – Section 106 planning obligations and the Community Infrastructure Levy - in England. This consultation will inform the design of the Levy and of regulations that will set out its operation in detail. A further consultation on the drafting of those regulations will be published in due course. Alongside this publication is a report on an earlier design of the Levy, commissioned by the Department for Levelling Up, Housing and Communities.”