Introduction of an Infrastructure Charging Mechanism in Scotland: research project

Annex A: Review of the CIL Report

Introduction

This note outlines the key findings from the CIL Review & Report of Study, its recommendations, and the implications for the Scottish Government’s Stage 3 research into the development of an infrastructure charging mechanism in Scotland.

The note is an additional output to inform Stage 3 of the Scottish Government’s research into the infrastructure levy.

Background

The Community Infrastructure Levy was introduced in April 2010 with the aim of providing a faster, fairer, more certain and transparent means of collecting developer contributions for infrastructure compared to individually-negotiated Section 106 planning obligations.

The independent group chosen to lead the review was chaired by Liz Peace with a remit to assess the extent to which CIL does or can provide an effective mechanism for funding infrastructure and to put forward changes that would improve its operation in support of the Government’s wider housing and growth objectives.

The Report was released on February 2017.

Notes on Report of Study

A Report of Study (The University of Reading and Three Dragons in association with Smiths Gore and David Lock Associates) accompanied the final CIL Review submitted to Government in February 2017.

Preparation

The Report of Study examined the implementation of CIL across England. It confirmed that CIL has been concentrated in more affluent parts of the country where market and land values are higher than average, with over 50% in London and south east of England. Viability in implementation in collection was an issue, costing between £15,000 and £50,000. There was significant non-participation at August 2015 (146 LPAs in England and Wales), and reasons for this varied, though most cited a delay in preparing local plans. Others mentioned the difficulties of developing CIL in rural areas, and those who could not generate sufficient revenue to fund necessary infrastructure.

Another concern with respect to operation was that there was little commonality in approaches to identifying infrastructure, namely in variable approaches taken to Reg. 123 lists. Among authorities that have included more detailed Reg. 123 projects, the number and scale of projects included varied. Whilst Reg. 123 lists were viewed as generally easy to change, there is criticism that they are not formally tested as part of the examination process.

The preparation of charging schedules was relatively well-understood by most respondents, but it is nevertheless viewed as complex, time-consuming and resource intensive. Central to the process was the viability study, though it was acknowledging that there was a lack of consistency in how these were undertaken. Scaling back S106 payments was also a common practice amongst authorities.

In terms of operating different rates across zones, it was considered that there were no clear difficulties or disputes.

Operation

However, the operation of CIL was viewed as relatively clear and not too burdensome, though regulations were viewed as complex.

The operation of CIL was estimated to involve less than one FTE across all assessed authorities, though there were workload concerns amongst some authorities with respect to managing exemptions. The process of charge-setting was not viewed as particularly onerous. Issues arose with respect to time taken to check floorspace, disputes over amount of floorspace to be ‘netted off’, issues about the type of use for new space, and use of BCIS index for uprating CIL rates.

The introduction of CIL in view of S106 showed that there was significant variation in how the two systems operated together. In some cases, it was simpler to continue seeking S106 rather than CIL, whilst others saw CIL as simpler. There were issues in continued complexity of S106, with some claiming that the introduction of CIL had made this more complex. The operation of reliefs and exemptions have not been viewed by local authorities as too complex but applicants often required guidance from the local authority to understand the regulations surrounding this.

There was a suggestion that local authorities had taken ingenious steps to avoid or circumvent the regulations. It was considered in the CIL review report that this side-stepping was a waste of both local authority and developers’ time yet forms part of an emerging ‘best practice’ that balances viability and the need for infrastructure funding.

There has also been criticism of the ‘Neighbourhood contributions’ element of CIL. There are perceived and real limitations in the level of contribution given to neighbourhood bodies which in many cases is unable to substantively fund locally identified projects. Where local requirements are set, it was generally viewed as a constraint to some local authorities where it was considered that S106 was more realistic to ensure delivery of viable sites in lower value areas.

In terms of CIL adoption, there were varied perceptions of the resource intensiveness and length of time taken to adopt CIL. Adoption of CIL took between one and two years. Some found the process resource intensive and time consuming, but this may be tied to the resources available within the local authorities.

There has been support from observers in England ^[18] particularly in the “Mayoral-style” CIL approach, though it is argued that a regional formula rather than a national formula may be more effective. In terms of the commitments of Government to reform, it has also been suggested that this will leave many local authorities in limbo, between a resource intensive implementation of CIL and further direction from the Government from non-adopters or authorities where the system has demonstrably failed. ^[19] There is equally a concern that a new twin-tracked system may not help viability.

CIL Review Recommendations

The findings of the Report of Study informed the information presented in the CIL Review and, ultimately, the recommendations set out by the group.

Key Points from the Review

• CIL is not delivering as much as anticipated by the Government and Local Authorities;
• Charge set at low levels in many local authority areas to accommodate development, though this has resulted in lower payments compared to previous system;
• CIL is not raising enough revenue to effectively support the funding of infrastructure needed to support development;
• Confusion between S106 and CIL was not as pronounced as previously thought;
• Mixed evidence with respect to the impact of affordable housing;
• Regulations were viewed as too complex;
• Charge setting process is lengthy and expensive, at broadly £15,000 to £50,000 per local authority. Outcomes of charge-setting process also different in places where expected to be similar due to local economic conditions; and
• Exemptions produce a significant amount of bureaucracy for no compensation .

Following on from these conclusions, the review set a number of conditions for the creation of a new system :

• Consistent and flexible on a nation-wide basis;
• Provide an upfront quantum for developers and accommodate the needs of those promoting larger schemes;
• Streamlined regulations to improve the understanding and speed of implementation;
• Offer a clear route through which necessary developer funded infrastructure can be delivered;
• Reassurance to communities that impacts of development will be mitigated and risks of delivery of that mitigation attached to those able to bear it;
• Accommodation creation of combined authorities and cross-boundary working across the HMA;
• Implementation with minimal disruption to developers with existing permissions and for future planning applications during a transitional period and for LPAs having adopted CIL; and
• Quick and simple planning applications for small builders and developers.

The Review does not propose to remove CIL altogether. However, rather than seeking to amend CIL to work universally, it suggests a new solution in the form of the LIT/ SIT and hybrid LIT/ CIL, S106 system. It suggests that the simplification of these procedures together with a clearer S123 list and removal of barriers to delivery of localised infrastructure delivery particularly through pooling restrictions. This ‘twin track’ delivery aims to optimise contributions from smaller sites which may not otherwise contribute to S106 whilst also ensuring substantial infrastructure needs of larger developments are met timeously.

The recommendations therefore focus on a simplified system which would require relatively straightforward adoption processes. However, the Review does not detail how the proposed system would operate—how existing legislation would be accommodated, details on transitions, how to differentiate geographies, how to ensure viability from the perspective of delivering development, who would be responsible for the ‘strategic’ infrastructure, and what a ‘strengthened’ S122 system would look like to regulate S106 contributions in absence of restrictions. It also recognises the need for local authorities to work together and reflect changing systems of governance (e.g. with the creation of Combined Authorities) in the delivery of large infrastructure projects.

LIT System

The Local Infrastructure Tariff is a replacement to CIL which will not require a precise “relationship between the quantum of infrastructure need and the amount of LIT that is charged”. The proposed system applies a blanket charge based on gross floorspace. It will be calculated by the government and will be applicable across local authorities, with few (if any) exemptions, to reduce bureaucracy and make it easier for LPAs and developers to enact the charge.

The Report does note that there should be options for additional charges in a ‘Mayoral’ type- CIL across authorities for larger infrastructure projects. It has been shown in the evidence that the best option for the implementation of CIL was a
flat-rate ‘mayoral’ CIL in the delivery of infrastructure projects.

It is unclear how, without a rate being set to infrastructure need, an adequate amount can be raised to meet regional infrastructure requirements. The success of the mayoral CIL, while simplified by being a flat rate across zones, was partly due to its funding particular infrastructure needs that was clearly costed. The extent to which the LIT would be tied to specific infrastructure projects is unclear.

The Review recommends that the charge is based on 1.5 to 2.5% of sales price of residential developments across local authority areas, worked out to a per sq. m. charge. This accepts potential for market variation. It does not immediately address how this might be squared on smaller geographies where there may be a significant amount of variation. This would presumably require some sort of valuation and zone-setting and how these respond to wider market geographies and indeed demonstrate a relationship to cumulative impact.

In terms of commercial development, it is suggested that rates are tied to but do not exceed residential rates. The formula for determining this should be developed by the Government to ensure consistency.

The report notes that whilst the government may want exemptions, these should not be considered and that all (or the vast majority of) developments be liable to pay. The idea is that all developments contribute in some way to cumulative impacts.

There is a suggestion that the ‘pooling’ restriction requirement be removed, though notes that this should be treated through enhanced S122 Regulations. It also suggests there ought to be contributions ‘in kind’ provided in lieu of LIT for items such as schools. There is a definitional issue and risk of conflating ‘local’, ‘more than local’ and ‘non local’ impacts.

The recommendations include provision that LIT is a mandatory charge unless it is considered that the amount of money raised does not justify the expense of raising it.

Combined authority Strategic Infrastructure Tariff

The Review recommends the creation of a ‘regional’ tariff, applicable to a ‘small number’ of large-scale developments. It would presumably apply to cross-boundary infrastructure. There is little discussion about how this would be differentiated to the LIT in terms of scale of infrastructure and how this would be managed.

They also promote greater cooperation between authorities and HMAs/ FEAs. There are no proposals as to how this is sits with rate setting and what involvement these authorities may have in the process. However, it is recommended that Combined Authorities should use this mechanism as a means of raising additional infrastructure finance.

Other Provisions

Borrowing against the Levy

The Review also recommends allowing powers for charging authorities to borrow against LIT/ SIT receipts.

Pooling Restrictions

Pooling restrictions were found to prevent the apportionment of large sites into smaller development packages suitable for smaller scale household builders. Side-stepping these restrictions involved some creative methods which suggests that it was unnecessary and resource intensive.

Regulation 123 List

The review calls for the removal of Regulation 123 lists, replaced with an annual monitoring report.

Affordable Housing

It is recommended that all developments are liable to pay LIT, including small development (10 units or less), including affordable housing.

Other Options

The Report recommends that “other options should be explored that would enable local authorities to forward fund infrastructure provision”. The Report recognises that this has much to do with the Government finding ways to best make funds available to local authorities to forward-fund infrastructure.

Implications and Applications for Scotland

The review of the CIL Process provides insight into the design and operation of the system, giving a sense of emerging best practice and points for improvement.

The core recommendations are the introduction of the LIT/ SIT and dual track S106 system. The design/implementation is tied demonstrably to local authorities and combined local authorities. Conclusions from Stage 1 and Stage 2 generally reflected the need to consider alternative geographies (i.e. beyond local authority areas) and to consider how low value market areas may benefit from a charging mechanism. The Review points out that it may be a matter of local authority discretion to determine whether it would be worth collecting a tariff.

The key constraints to the viability of a charging system in Scotland is ensuring a mandatory charging system reflects need and market geography. If the system were to operate at a regional level (e.g. through enhanced SDPAs with a remit for infrastructure), then there would be significant variation within those market geographies. The Review emphasises the importance of local determination of need, and this may be captured in part through the emphasis of a ‘nationally determined charge’ based on gross floorspace, derived from median sales values.

The Report recommends a straightforward approach to setting charges based on median property values. The principle of straightforward evaluation of prospective or observed property values arguably makes sense in the Scottish context and would be necessary in assessing differential market areas. These geographies may, for example, follow statistical boundaries on which price-paid values are already recorded. These could be assessed against anticipated growth and demand through allocations. Consultations suggested that charge setting may be assessed through the SFT in coordination with planning authorities and SDPAs

The CIL review clearly advocates a simplified approach to contributions, and one which takes into account local economic conditions. A simple, mandatory, tiered system to covering ‘more than local’ cumulative impacts is sensible and straightforward, lessons from Stage 1 and 2 suggest it should (1) be tied to existing systems of governance; (2) be clearly based on need and demonstrate relationship (among other tests); and (3) be tied to clear, costed action programmes. The review evidences these considerations through advocating centralised frameworks for the ‘number of different commercial developments and the proportional relationship’ to a residential charge to account for local market variations. It can therefore be tied to local planning priorities and included in the Annual Monitoring Report to show how spending of the tariff is meeting local infrastructure needs, and its correspondence to local plan preparation.

In summary, the Review recommendations indicate that the direction of travel for Stage 1 & 2 Research does not show significant departures from the Review. Indicative analyses of the potential for a minor contribution of a levy to infrastructure needs is also reflected in the Review which is clear about the need for front funding and identifying other sources of infrastructure funding. In particular, there is clear resonance in:

• The need to retain other systems of contributions and making their interrelationships clear;
• Developing a simple system for collection that is tied demonstrably to the planning process;
• Capturing ‘more than local’ infrastructure requirements;
• Centrally defined methodology for determining contributions; and
• Ensuring a limited number of exemptions.

However, whilst the Review recommendations support the cost of mitigation being born by those who are ablest to pay it, there is less clarity in the relationship of impacts and development. This is particularly the case given the emphasis on necessity tests tied to obligations—the CIL review suggests that Regulation 122 is only applicable to the use of Section 106 agreements.

There is also a departure in the two-tiered approach to developer contributions. The ‘high level’ options identified in the Stage 1 & 2 research advocates a regional or cross-boundary levy, which contrasts the two-tier tariff suggested in the CIL report.