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News Release from: Chartered Institute of Building [CIOB] | Subject: PGS
Edited by the Buildingtalk Editorial
Team on 14 March 2006
PGS does not perform on low value, high
cost sites
For English Partnerships, the main issue in the Government's Planning Gain Supplement consultation has been the funding of the infrastructure.
For English Partnerships, the main issue in the Government's Planning Gain Supplement consultation has been the funding of the infrastructure Therefore in its response the United Kingdom's national regeneration agency expresses strong support for "the principle of capturing an equitable portion of the land value uplift created by planning permission and public sector investment, to support infrastructure provision for wider community benefit"
This article was originally published on Buildingtalk on 14 Mar 2006 at 8.00am (UK)
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One important limitation on PGS is that the number of development sites yielding a sizeable contribution to the financing of public works and services would be relatively limited.
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This is why, it says, English Partnerships has pioneered innovative solutions to infrastructure funding such as the Milton Keynes tariff to deliver its objectives.
These models, it claims, minimise cost to the public sector whilst increasing certainty and reducing risk.
It is evident from its response document that English Partnerships welcomes the consultation on the planning gain supplement (PGS) rather more than the supplement itself.
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It has given the agency an opportunity to expound the rationale of what the Government paper describes as 'standardised planning obligations', otherwise known as the planning tariff.
Under the heading 'Financing Infrastructure Through the Planning System' (Chapter 5) , the Government paper explains that the Milton Keynes Partnership has developed a 'prospectus' identifying and prioritising the local infrastructure (e.g schools) and strategic infrastructure (e.g roads) needed to deliver 15,000 homes over the period to 2016.
The prospectus also identifies the infrastructure contributions to be made by developers broken down on a per dwelling basis.
The Section 106 contribution that developers are expected to make amounts to around £18,000 per dwelling, plus land for social infrastructure and affordable housing.
In order to overcome the timing differences between expenditure on infrastructure (front-loaded) and receipts from developers (forthcoming over time), English Partnerships has agreed to forward-fund the infrastructure and recoup the outlay from developers.
Now the outstanding advantage of this approach is that it works, and the developers like it.
It provides the construction industry with an ongoing stream of work which has a degree of certainty about it, and from the point of view of the development authority, can be programmed.
Against that, the development industry as for example represented by the British Property Federation and the RICS, is convinced that the PGS will not work, and is begging the Government to abandon it.
True, as the Government position states, developers find the current system of planning obligations confusing and unpredictable, but that is more the fault of the way the provision is drafted than the fault of those who have to administer it.
What the Milton Keynes Partnership attempted to do was to make the system of planning obligations, originally highly restrictive in scope, a practical tool for the developer as well as for the commissioning authority.
Now the Government is proposing to return Section 106 to its original limited role, thereby depriving local authorities this source of funding for much essential infrastructure, notably to finance educational needs in the growing communities.
What English Partnerships is proposing in essence is using either Section 106 or PGS to the best advantage.
Where the two approaches differ is that the English Partnerships' proposals are founded on a great deal of experience in working with the development industry, whereas the consultation document betrays dearth of experience in its lack of clarity in a number of important areas.
As the agency's paper demonstrates, much depends on the rate and the location at which PGS is to be levied.
There have been various shots at guessing what the Government means when it talks about a modest rate.
Will it be 10 or 20 per cent of the residual value? The case study work done by English Partnerships shows that the incidence of PGS at any point in the landscape has a strong influence on the outcome of attempts at "capturing an equitable portion of the land value" when planning permission is granted.
They suggest that the Government should test the rate on real case studies rather than general market data as used in the consultation.
As anyone with experience in the land market knows, in this area general data is not much use.
So what do the 'real case studies' show? In many cases nothing will be gained by way of PGS.
This is the conclusion of the first case study, based on a coalfield site in the North East of England with planning permission for 656 homes, 32 of which are 'affordable'.
The site is currently unused.
As things stand, the local authority would expect the developer to provide £400,000 planning contribution equal to £610 per unit.
This is after incurring construction and site remedial expenses greater than the gross development value of the site, reducing the Planning Value to a minus quantity - £2 million in this case.
From the standpoint of a PGS assessment, the Current Use Value of the site is zero.
Removing the S.106 contribution cuts the Planning Value deficit to £1.6 million, still no uplift, therefore no PGS.
The second site, likewise a coalfield site with planning permission for 376 homes, 25 per cent 'affordable', is of lower gross development value but has attracted a S.106 contribution of £3.3 million or £8,777 per unit.
Construction costs and remedial works are less, leaving a difference between gross development value and the development cost at £2 million, which gives negative Planning Value of equivalent amount.
Translate that into PGS terms, the S.106 contribution falls away to £100,000, producing a Planning Value of £1.2 million positive from the difference between the reduced cost to the developer and the gross development value.
The Current Use Value of the site is again zero, leaving £1.2 million uplift to be assessed for planning gain.
That produces £240,000 PGS to assist the local authority with infrastructure finance, a loss of more than £3 million under S.106.
A site in London's Thames Gateway has planning permission for 250 homes, 35 per cent 'affordable', site currently unused.
Again, the combination of remedial work, construction cost and S.106 at £1 million account for the gross development value, leaving a residual Planning Value equal to zero.
By the PGS route, again the S.106 element is diminished under the new rules, leaving only £20,000 contribution by the developer, the balance of the £1 million S.106 now appearing as Planning Value of £980,000 against which to set the Current Use Value of the site which happens to be zero.
Net uplift being equal to Planning Value, PGS at 20 per cent yields £196,000.
Thus the benefit of the S.106 agreement for affordable housing under the existing regime becomes taxable under the new system.
The situation is quite different on high value greenfield sites with planning permission.
With uplift of the order of £42.75 million on a Milton Keynes estate for 720 homes (30 per cent 'affordable'), English Partnerships calculate that at 20 per cent PGS, the revenue would be around £8.55 million.
This is derived from Planning Value of £43 million, less £250,000 residual Current Use Value, a contribution of £13,264 per unit compared with £5,555 with S.106.
To grasp the economic difference between PGS and the planning tariff, it is essential to follow what English Partnerships is driving at about improving the economics of development - that both S.106 and PGS would be capable of making useful contributions provided they are applied in appropriate circumstances.
Low value and high cost is not the realm of PGS.
It might work where there are big differentials in value.
But even then, the tariff might do it better when looked at from the aspects of certainty and timely incidence.
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