Planning - the value, incidence and impact of developer contributions: research

2. Literature Review

2.1 Objectives and Coverage

The objectives of the literature review are to clarify the provenance of the concept of developer contributions; how they fit within the policy and legal framework in Scotland - including the 2019 Planning Scotland Act and the planning reform programme; the particular position of affordable housing; together with empirical estimates of the value incidence and delivery of developer contributions and of affordable housing. Finally, it includes some comparison with how similar arrangements in England as well as how similar issues are addressed in comparable countries overseas.

Annex 2 sets out the detailed literature review. Here we identify some of the most important findings. The literature falls into three main categories. Discussion of the principles behind developer contributions and more general land value capture; government publications which clarify their approach to developer contributions within policy – both general and specific to contributions - and the legal arrangements; and research-based evidence on the rationale of the system, how it actually operates and how much it produces together with some comparative literature. The full literature review can be found in Annex 2.

2.2 The rationale for developer contributions

The literature stresses that the rationale for developer contributions includes:

(i) planning permission increases land values;

(ii) new development may require investment in order to mitigate the impacts of the development – e.g., the need for more school places;

(iii) it is logical that those who have benefitted from the permission should pay these costs.

Perhaps a simpler way of stating this, found in the economics of planning literature, is that using land value increases resulting from the granting of planning permission is an efficient and fair way of paying for necessary infrastructure associated with that development because, if well managed, this does not distort economic decisions.

A rather more controversial rationale, much discussed in the academic literature, is that developer contributions should be part of a more general policy of capturing land value increases for the public benefit (not just those resulting from the granting of planning permission) – which is part of a wider discussion about good taxation principles.

While contributions are called developer contributions because it is they who formally pay the bill; the general expectation is that the costs will in the main be passed back to the landowner because they are part of the costs that the developer must take into account when determining the price that he/she is willing to pay to purchase the land. As such they are a de facto mechanism for capturing some elements of land value increases.

2.3 Recent policy debates

There was much debate around the time of the Planning Scotland Act 2019 about mechanisms for capturing land value increases to pay for infrastructure and affordable housing. That Act contains powers for Scottish Ministers to make regulations establishing an infrastructure levy, the income from which would be payable to local authorities for the purposes of funding infrastructure projects. The regulation-making power, which lapses seven years from the 2019 Act receiving Royal Assent, has not yet been implemented.

In addition to the infrastructure levy powers, opposition amendments introduced during the passage of the 2019 Act sought to go further by making provision for land value capture via compulsory purchase. The underlying intention was to enable local authorities to acquire land more cheaply by reforming the rules governing compulsory purchase compensation. In short, the amendments aimed to achieve this by excluding consideration of land's development potential ('hope value') for the purposes of assessing compensation. In May 2019 the Scottish Land Commission (SLC) published advice to Scottish Ministers on the potential options for land value uplift capture. This highlighted that the proposed amendments to the land compensation rules were unlikely to achieve their stated aims and risked being in breach of the European Convention on Human Rights, not least because landowners subject to compulsory purchase would receive less than if they had sold their land on the open market (in breach of the "equivalence principle"). In this context, it was suggested that there be a review of existing land value capture mechanisms, a recommendation that is now being addressed.

A key driver for reform, set out in the recent National Planning Framework 4 position statement, has been the intention to establish an 'infrastructure first' approach to development planning, with Development Plans providing the key link between the infrastructure needs of development and the funding and delivery mechanisms of infrastructure providers. The intention is to involve infrastructure providers, developers and other public bodies to ensure an integrated and coherent outcome-based approach to land use planning.

2.4 The legal framework

The current system of developer contributions in Scotland has evolved piecemeal. Planning obligations are legal agreements entered into under Section 75 of the Town and Country Planning (Scotland) Act 1997). Planning obligations can be used to secure contributions to, or provision of, infrastructure and affordable housing. Although the Act itself does not tightly define the scope of Section 75 planning obligations, their use is subject to the five national policy tests currently set out in Circular 3/2012 (see below). Planning obligations can be entered into between a person with an interest in the land and the planning authority; or via a unilateral undertaking by a person with an interest in the land.

Developer contributions can also be secured through Section 69 of the Local Government (Scotland) Act 1973, which gives local authorities the power to enter into agreements for a purpose related to the discharge of any of its functions – including affordable housing. Finally, they may be sought through Section 48 of the Roads (Scotland) Act 1984 which allows roads authorities to enter into an agreement with any person willing to contribute to the construction or improvement of a road.

Section 75 planning obligations are enforceable against successors in title if they are registered in the Land Register of Scotland or recorded in the General Register of Sasines. Because planning obligations can run with the land, they can be a particularly appropriate mechanism where ongoing or phased payments are sought and/or where a site involves multiple developers.

2.5 The national policy framework for developer contributions

The policy framework governing the use of planning obligations is set out in detail in Circular 3/2012, the most recent version of which was published in November 2020. The Circular provides that Section 75 planning obligations should only be sought where they:

• Are necessary to make the proposed development acceptable in planning terms;
• Serve a planning purpose and, where it is possible to identify infrastructure requirements in advance, should relate to development plans;
• Relate to the proposed development either as a direct consequence of the development or arising from the cumulative impact of development in the area;
• Fairly and reasonably relate in scale and kind to the proposed development; and
• Are reasonable in all other respects.

Circular 3/2012 stresses that planning obligations should only be used where the relevant outcome cannot be achieved through either a planning condition or an alternative legal agreement (e.g. under s69 of the Local Government Act 1973). The circular points out that alternative legal agreements may be more appropriate where, for example, one-off payments are sought.

Recent appeal decisions and case law have reinforced the need for a clear link between a proposed development and the infrastructure provided (or contributed to) via a planning obligation and the need for contributions to be proportionate to the scale and nature of a development's impacts.

2.6 Affordable housing

Affordable housing has been a significant part of the development contribution policy including in particular on-site provision. Policy makes it clear that provision must be based on identified local needs and be of good quality and design. Scottish planning policy calls for no more than 25% but also that they can be required on any size of site. PAs may require higher proportions if justified by the local needs assessment.

2.7 Evidence on LPA policy and practice on infrastructure and developer contributions

Previous studies, the latest in 2016 have suggested that most PAs in Scotland (maybe of the order of 80%) use developer contributions but in very varied ways. Studies have shown that very small proportions of planning permissions have requirements for developer contributions attached. Some PAs have highly sophisticated systems. Research has also suggested that decisions are often made on a case-by-case basis not always supported by plans and supplementary guidance or consistent across agreements. Contributions not specified in policy or guidance may also be introduced quite late in the process reducing clarity and certainty for developers. Land values are then difficult to assess.

Researchers have suggested that contributions may not always work well on large complex sites because of the need for front loaded infrastructure and that there are difficulties in ensuring equity between the first and later on-site developers. But there were also many more general concerns about the timing of payments in relationship to when infrastructure is required and addressing the cumulative impacts of development.

We also noted that there were, at the time of earlier research, concerns that development plans were not always aligned with infrastructure needs, and that contributions were often concentrated on dealing with physical site constraints rather than on these wider infrastructure requirements. Even so, it was noted that most Local Plans addressed the delivery of infrastructure if often in rather general terms. Infrastructure for which contributions were required concentrated on roads and green infrastructure as well as education and local public services.

The empirical literature suggests that there are many concerns about the negotiation process and the time taken to obtain agreement, their lack of transparency and potential for change, as well as concerns that infrastructure is not always provided, despite contributions having been made. Site viability was a core issue recognised in supplementary guidance but its assessment meant individual applications must be accompanied by relevant data.

2.8 Estimates of the incidence, value and delivery of developer contributions in Scotland

Previous research has indicated that the overall potential for contributions is less substantial than in England because development values are generally lower in Scotland, and that contributions would be more heavily concentrated in high-value areas.

Earlier studies, the latest in 2017, suggested that the amounts collected were quite small in many parts of the country because of the lack of value to capture. However, they also suggested that there was potential for some increases in the value of contributions. More recent studies have seen such increases. Even so, one of the latest studies (in 2016) suggested, based on annualised land values that perhaps a total £230m per annum would be available for affordable housing and infrastructure of which maybe £130m would come from S75 agreements. The study advised that it would be better to concentrate contributions on local impacts and affordable housing and to impose a charge on completed developments to help towards wider infrastructure coats. It has also been noted that land values are captured by other forms of national taxation such as Capital Gains Tax (CGT) and Land and Buildings Transaction Tax (LBTT), although these are non-hypothecated.

2.9 Delivery of affordable housing through developer contributions

Contributions towards affordable housing were very limited at least until the new millennium, both because of the need to provide explicit evidence of local need and that in many localities while the need was there the land value was not. Local housing strategies introduced in 2001 provided a clearer framework. Researchers in 2014 noted that between 2007/8 and 2011/2 a third of all affordable new build had involved developer contributions and that many PAs had policies on affordable housing in place. Most contributions were in the form of completed units; discounted land accounted for about 20% and commuted payments rather less. Researchers were concerned that grants might have enabled higher land values and that the advice as to 25% was putting a cap on contributions. Finally, the rural exceptions policy was hardly used.

There have been two estimates of affordable housing requirements in the last few years suggesting that around 60,000 were needed from 2016 – 2021 but this declined to 53,000 from 2012 – 2026. They supported the continued use of grant to help meet these needs. Other research suggested that developers were concentrating more on high valued areas with development on lower valued areas being undertaken more by local builders and affordable housing providers. Most recently, the Scottish Government has announced its long term housing strategy looking ahead to 2040 which makes the commitment to build 100,000 new affordable homes by 2032 once its current five-year target of 50,000 homes is completed by 2022.

2.10 Advantages and disadvantages of planning obligations in Scotland

Existing literature suggests that the main advantages are fairness, because developers are only asked to contribute in line with the development; and flexibility in the face of viability challenges and changing market conditions. Disadvantages are related to lack of transparency; inconsistency; uncertainty around negotiations; delays and the extent to which they are inadequate to support infrastructure in many areas where it may be most needed.

2.11 Experience of developer contributions in England

The systems are seen as generally similar. Two distinctions are important:

1. the existence of the Community Infrastructure Levy (CIL), which operates alongside planning obligations in England and allows authorities to secure contributions towards infrastructure, including sub regional and regional infrastructure, that is not directly connected to the specific development for which planning permission is given; and

2. a grant regime in Scotland that supports affordable housing including significant proportions of social rent, while much affordable housing (notably affordable homeownership) in England is developed with no grant.

The amounts collected in England have risen from around £2.6 billion in 2003/4 measured in 2018/19 terms to £7bn in 2018/19. They contribute to new affordable homes as well as infrastructure (£4.7 billion and £2.3 billion respectively)

It is accepted that the costs that developers incur in making contributions fall mainly as lower land prices paid for land although the extent to which this is the case depends on the transparency and certainty of local plans and of implementation. Estimates suggest that on greenfield sites developer contributions including CIL take around 30% of the value of the land. A further 20% is taxed away via capital gains and transactions taxed.

Finally, there have been regular assessments of how much the system in England generates in funding and in kind contributions (such as on site affordable housing) and the effectiveness of the processes involved undertaken for the Ministry of Housing, Communities and Local Government.

More details of experience in England are provided in sub-annex 2A.

2.12 Overseas experience

It is worth noting that there is an extensive literature on overseas experience of capturing development value and of providing affordable housing through the planning system using a wide range of mechanisms. Some of the most successful involve very direct involvement by local authorities in land acquisition and assembly, infrastructure provision and development delivery including through joint ventures.

More details of possible lessons relevant to Scotland are given in sub-annex 2B.