First Phase 2004 to October 2007 – The PGS Proposals

The commissioning of the Review of Housing Supply in 2003 (Barker 2004) was based on the concern that the supply of new housing was inadequate and a review was set up on 9^th March 2003, with the following terms of reference

"Conduct a review of issues underlying the lack of supply and responsiveness of housing in the UK.” (Barker, 2004, p3)

The objectives of the review were related to not just a lack of supply, but to issues of volatility in the housing market which “exacerbated problems of macroeconomic instability and had an adverse effect on economic growth” (Barker, 2004 p11) and of lack of affordability. The report went on to state

“A key factor underlying the lack of supply and responsiveness is an

inadequate supply of developable land. More land will need to be released or made viable for development, if housing supply is to increase. Better use of existing or previously developed land and buildings can be achieved through bringing derelict and contaminated land back into use. Many of the Review’s recommendations aim to secure this objective” (Barker, 2004 p12).

The report considered the challenge under five headings, planning for development, delivering development, contributing to development, accessing housing and the development industry. In terms of the capture of value this is primarily considered in the section “contributing to development”. Under this section recommendation 26 stated the following regarding value capture

“Recommendation 26

Government should use tax measures to extract some of the windfall gain that accrues to landowners from the sale of their land for residential development.

Government should impose a Planning-gain Supplement on the granting of

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planning permission so that landowner development gains form a larger part of the benefits of development. The following principles might be considered:

• Information would need to be gathered as to the value of land proposed for development in each local authority. Sources of data could include actual transactions and/or Valuation Office Agency estimates as to the land prices in various local authority areas.

• Government would then set a tax rate on these values. This tax should not be set so high as to discourage development, but at a rate that at least covers the estimated local authority gain from Section 106 developer contributions and provides additional resources to boost housing supply.

• The granting of residential planning permission would be contingent on the payment of the Planning-gain Supplement of the proposed development.

• Government may want to consider the operation of a (substantially) lower rate for housing development brownfield land, and the possibility of varying rates in other circumstances, e.g. for areas where there are particular housing growth strategies, or where other social or environmental costs may arise.

• A proportion of the revenue generated from the granting of planning permissions in local authorities should be given directly to local authorities.

Government should also amend the operation of Section 106 planning obligations, as set out elsewhere in Chapter 3, to take account of this new charge.

• The Government may want to consider allowing developers to pay their Planning gain Supplement in instalments over reasonable time periods so as to ensure that house builder cash flow pressures are sufficiently accounted for.

The introduction of a tax would need to be accompanied by transitional measures to ameliorate the impact on developers already engaged in land sales contracts that were drawn up before this charge was introduced, or for those who hold large amounts of land already purchased, but where planning permission has yet to be secured” (Barker, 2004 p87).

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What is significant in the review is the justification of the value capture in terms of the windfall gains (economic rent) accruing to the landowner from the granting of

planning permission to develop the land and how capturing this windfall gain was a key justification for value capture. Also that this income was needed to fund

infrastructure provision and in turn to provide some greater certainty to infrastructure provision. It was however clearly presented that the PGS should not be seen in isolation but part of a wider policy package. As PGS was a tax on land value, this could potentially be a disincentive to landowners to bring forward sites for

development, this was to be offset by other policy benefits such as the certainty of infrastructure provision and a more proactive planning system providing a supply of sites for development (Barker, 2004).

In December 2005 the Government commenced a consultation on introducing PGS (ODPM, 2005c) alongside a wider justification of its response to the Barker Review (ODPM, 2005b). Whilst the proposals in the latter document are set within the wider context of a step change in the provision of infrastructure and in the planning system, the PGS document presented a mechanism to capture the uplift in land value

resulting from the grant of planning permission. This was also presented as part of a wider growth based strategy to bring forward more sites for housing development and more rapidly, supported by infrastructure provision, partially funded by the money collected from the PGS itself and with a more flexible and proactive planning system. The suggestion is also made that the PGS should be reflected in lower land values and lower bids for land by developers.

There were still further details to be worked up, but in Chapter 2 (ODPM, 2005c) the calculation of the charge was discussed; the difference between current use value (CUV) and planning value (PV) was a key issue. The proposals would need to be calculated based on market evidence this was a change from the average value for an area approach, proposed in the Barker review (Barker, 2004).

The other key concern was that the planning system by restricting the supply of sites had slowed down and stopped development. In addition, the restriction on the supply of sites by the planning system had also increased the value of land and therefore provided some justification for the capture of some of that increased value for the public sector.

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The impact of the institutional structure of the British house building industry, being concentrated in a small number of volume house builders, who are focused on competing for a restricted supply of housing sites due to the planning system, was also considered. It was considered that the effect of this was to force up land values, but also potentially to slow down development as house builders try and keep a supply of sites flowing, if the securing of sites takes too long, this will lead to land banking and a slower pace of development overall (Barker, 2008).

The House of commons DCLG Committee in October 2006 (CLG, 2006b) also discussed the PGS and it again made reference to the fact that it was only fair that communities should share in wealth created by planning decisions made in their area. Whilst this was conceptually different from the s106 process, it was

acknowledged that the existing s106 system had sometimes been used as a means of compensating communities for the negative consequences from new development in their area, and had therefore been used as an informal, variable and unpredictable tax on land value uplift (CLG, 2006b).

In December 2006 the Government published its response to the committee (CLG, 2006a), the Government still considered the PGS as appropriate and a fairer means of capturing land value, because it was based on land value uplift rather than on the costs of infrastructure. It went on to state that PGS was more proportionate and should not inhibit development on marginal sites. Whilst tariff based approaches such as that used in Milton Keynes had previously been supported, they didn’t have the same potential as PGS (CLG, 2066a).

Issues had also been raised about the calculation of PGS and the valuation

methodology, it was agreed that using actual valuations would be fairer to developers for the calculating of CUV and PV, but that standard definitions would need to be agreed and understood by various stakeholders including the development industry, this would be crucial (CLG, 2006a). The detail of the implementation of PGS would continue to be discussed, including two specific elements, the need to reflect actual site conditions, but also to assume a freehold vacant possession, rather than involve complex and costly valuations of different legal interests in land (CLG, 2006a).

However by July 2007 and the Housing Green Paper – “Homes for the future – more affordable, more sustainable” (CLG, 2007a), the Government whilst still stating that

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PGS was its preferred option, wanted to be sure that it was the best option and consulted on four alternatives. Whilst still advocating that developers required reduced uncertainty regarding infrastructure delivery and that local communities should share in the benefits from planning gain. The four alternatives proposed were as follows:

(a) Lower rate of PGS and reduced scaling back of s106, so no need for PGS to replace lost s106 income, to be additional income.

(b) PGS limited to Greenfield sites, this would require EU state aid approval.

(c) Charging system based on an expanded s106, this would be a standard charge to mitigate the impact of development and be set out in the LDF and clearly linked to infrastructure need and be evidence based justifying the charge level for different types of development

(d) Statutory Planning Charge – local authorities to require standard charges to be paid for infrastructure need, enabling capture of planning gain more systematically. Developers would be required to pay an average standard charge based on total costs of infrastructure in their area. It had the advantage of easier collection and the collection of additional funding of a large proportion of developments of a small scale (CLG, 2007a).

After continued discussion with stakeholders and consideration of the feedback received by a range of organisations on 9^th October 2007, the Minister for DCLG made a statement that PGS was to be withdrawn and replaced by a “statutory planning charge” (CLG, 2007b). The details were still to be prepared, but that this would be tested as part of the LDF process and would be based on the infrastructure proposals therein and taking account of land values.

The Pre-budget report in October 2007 (HMT, 2007) also confirmed that the PGS was to be replaced by a new planning charge. The Government published its response to the consultation as well, which highlighted its concerns with the PGS, which were about the calculation of the current use value (CUV) and planning value (PV), and the rate that would be charged, as no rate was ever set out (HMRC, 2007).

A range of objections were raised to the PGS, some of which had been highlighted in the original Barker Report, that landowners would just wait to sell land and so supply

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would fall, also there was concern about the impact on brownfield development. This new planning charge would be later named the Community Infrastructure Levy (CIL) and is now considered.