The Infrastructure Levy: A Radical, Risky, Reform that we all need to engage with
This blog started life as an opinion piece written for a roundtable with RPS and DLUHC discussing the Infrastructure Levy proposals that are currently out for consultation. The roundtable was this morning and was a genuinely fascinating discussion.
The consultation closes on 9 June 2023 and is vitally important. Please engage with it.
Now, back to the article
As currently designed, the Infrastructure Levy is both a radical shift in approach to infrastructure funding and an extremely risky one.
Moving to a system of infrastructure funding based on recovering a percentage of a development’s gross development value, above a minimum threshold, is bold. To date, the fundamental principle of infrastructure funding, whether via s.106 agreements or through CIL, has been that developments should provide the infrastructure “necessary to make the development acceptable in planning terms”. Whether in-kind, i.e., the delivery of a new school on site, or in cash i.e., a financial contribution to fund new school places. To date, this has always been calculated as a development cost – not as a share of the gross development value (GDV). This is a crucial distinction. Development costs are fixed and calculable at the start of a project. GDV is not. It is highly market dependent. This distinction goes to the heart of why the Infrastructure Levy is such a high stakes gamble.
The levy, as designed, does build-in an element of market responsiveness. By making the rate charged a percentage of GDV, the local planning authority’s receipts will fall and rise alongside development’s GDV. This, however, is only part of the picture. The current design of the Infrastructure Levy does not pay sufficient attention to two factors that will be critical to the whether the policy succeeds – factors that are themselves heavily market dependent: The ‘minimum threshold’; and the attitude of lenders.
The ‘minimum threshold’ is intended to represent, on a £ per sqm basis, both:
- the costs of development in a particular location, and
- the value of the land being developed in its existing use.
If the last few years have taught us anything, it is that both elements are highly market sensitive and capable of volatility.
Some of the stated justifications for introducing the Infrastructure Levy are that it will:
- allow “for Levy liabilities to reflect market conditions”.
- “remove the need for planning obligations to be renegotiated if the gross development value (GDV) is lower than expected” and
- allow “local authorities to share in the uplift if GDVs are higher than anticipated”.
For these promises to be met is it is not just GDV that needs to float with the market, the minimum threshold needs to do as so well. If the minimum threshold is not sufficiently responsive, then the fact that GDV notionally tracks the market will make no discernible difference to the need for site specific viability assessments. Whilst the consultation suggests that the “minimum threshold” will be index linked – whether this is sufficient depends on both the frequency of indexation adjustments and the index used. If care is not taken, then sudden spikes in build costs (such as the one we are currently experiencing) could rapidly take the actual cost of developing a site above the minimum threshold allowed for in a local authority’s Infrastructure Levy policy – putting site specific viability straight back onto the table. The proposal for allowing the Secretary of State to override local decisions on charging schedules is intended to act as a safety valve in these circumstances but is an entirely discretionary power. A safety valve which may not be operational when you need it, is hardly a reassuring prospect.
The attitude of lenders to the Infrastructure Levy is much harder to predict but will be crucial if the policy is going to succeed.
Development finance plays an increasingly important role in our development ecosystem, particularly for SMEs. How easy or difficult it is to access finance can make or break development companies. A key metric for lenders, when deciding whether to lend on a project, is the anticipated level of developer profit which is frequently calculated as a % of GDV – the exact same basis on which the Infrastructure Levy is to be charged. At present, the minimum threshold does not include an allowance for developer’s return, abnormals, or the premium that a landowner might expect for releasing land for development. As such, the impact of the levy, at least in the initial ten year “test and learn” phase will be to directly squeeze the proportion of GDV available both for the landowner, and crucially, for developer profit. Whilst a lender’s position on what constitutes an acceptable profit level can vary dramatically – the general rule is that the less certain a project appears to be, the higher the rate of return that will be required. This creates a risk that, at least during the ten-year transition period, lenders will be actively disincentivised from lending to projects within a pilot LPA. This is a risk which does not appear to have been considered in the design of the policy.
The risks associated with introducing the Infrastructure Levy are not limited to developer attitudes and rate setting, although these aspects will be crucial.
The House of Lords is currently debating the Infrastructure Levy provisions of the LURB. A link to the Hansard debate from May 3rd is below and it makes for very interesting reading.
Some of the proposed amendments discussed included:
- Removing the examination process for charging schedules entirely - instead opting for an oversight procedure from the Secretary of State;
- Using Levy receipts to fund everything from emergency 'blue light' services to railway improvements;
- Requiring a specific percentage of levy receipts to be ring-fenced for affordable housing delivery;. and
- The risk of centralised funding for infrastructure delivery and local authority resourcing more generally being reduced in response to Infrastructure Levy funding becoming available.
This debate only serves to highlight some further, more political, risks associated with the proposed changes. Namely the risk that the Infrastructure Levy will be perceived as the solution to all public sector funding shortages - regardless of whether they are infrastructure related or not; or, alternatively, as an excuse to reduce central government funding for the types of infrastructure to which IL could be directed - such as early years or general education provision.
The very length of the “test and learn” period proposed by DHLUC suggests that they are aware of just how high stakes this policy will be, and how badly it can go wrong. The key question is whether those risks are worth taking. That is a question to which we don’t yet have an answer.
The amendments would remove the requirement for charging schedules to be examined independently, representing a significant simplification. That would reduce the otherwise heavy administrative burden for the Planning Inspectorate in examining every local authority’s charging schedules within a defined period, which would require considerable extra capacity. The Bill ensures accountability through public consultation, which should mean that infrastructure provision recognises the community’s wishes, and through the guarantee of the Secretary of State’s reserve powers to intervene when necessary.”